2012june q1

why the pv is more than the cash flow? why we do not discount the cash flow and why we are not taking 2010 as the first year?

It's a really weird approach and you shouldn't worry about it. But the figures have been worked out by calculating the terminal value of the project as at 2012. So, the 600,000 was invested 3 years ago. If it had been simply kept in the bank at 12.5%, it would be worth 600,000 x (1 + 12·5%)^3 = $854,297. The 2010 receipts of 141,840 could have been deposited at 12.5% for 2 years and would now be worth 141,840 x (1 + 12·5%)^2 = $179,516 and so on. Don't spend time on this - I'm sure it was a once off that few students would have done like this.

In this question Metis how do you get the dcf factor at 12.5%. The pv tables only give whole numbers ie 12%

Discount factor = 1/(1 +r)^n where r = discount rate in decimals n = period of the flow ^ = raise to the power So a 3 year d/c factor = 1/(1 + 0.125)^3 = 0.702

Very kind of you thank you very much.

Hi Gromit, Under this question I see the cash inflows for MIRR are calculated using the 4.5% deposit return rather than the 12.5% cost of capital. Why is this the case? Thanks, Ed

return phase-discounted at the reinvestment rate investment phase-discounted at the cost of finance (when no reinvestment rate is known, cash flows are assumed to be reinvested at the cost of capital since it it the minimum required by investors)

Thanks Rashid, I'll be conscious of this in the exam and if no reinvestment rate, I will state my assumption that reinvestment rate is same as cost of capital as outlined above. Regards, Ed

Correct.