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Hi,
Please can someone break down how they got 5.335? The question is below
The present value of the machine will be the discounted value of the future cash flows that it is expected
to generate. If the machine is expected to generate $500,000 per annum for the remaining eight years of
its life and if the company’s cost of capital is 10%, present value will be calculated as:
$500,000 x 5.335* = $2667,500
* Cumulative present of $1 per annum for eight years discounted at 10%Hi,
This 5.335 figure is the annuity factor at 10% for 8 years.
AF = (1-(1+r)^-n)/r
It is essentially a combination of 1/1.10 + 1/1.10^2 + 1/1.10^3… 1/1.10^8.
We use this factor for project appraisal when the expected inflow ($500,000) stays the same each year, throughout the project horizon (8 years).
Hope this helps.
Will the annuity factor be given to us in the exam? This is the first I’ve seen of it and from what I can see it is only given in a formula sheet in Financial Management, not Financial Reporting.
@periiism said:
Will the annuity factor be given to us in the exam? This is the first I’ve seen of it and from what I can see it is only given in a formula sheet in Financial Management, not Financial Reporting.I think it is given in the question. However, students should be able to calculate relevant discount factors using formulas in the syllabus.
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