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Dear Mr John,
Kindly assist me with this following question,
Z CO is evaluating a project which will generate cash flows of $2,600 each year in years four to eight. (The first amount will be received in four years from now)
What is the present value of the project cash flows using a discount rate of 14%?
a) $6,822
b) $6,024
c)$12,061
d)$4,485You really should watch the lecture on Interest, where I work through a very similar example.
If it the first amount was received in 1 years time, then you would simply multiply by the annuity discount factor for 8 years at 14%.
However, since the first receipt is in 4 years time, there is nothing for years to to 3.
So you need to subtract the annuity factor for 3 years at 14% away from the 8 year annuity factor.
This will leave you with the discount factor for years 4 to 8.Again, I do suggest you watch the lectures – they are a complete course covering everything you need to be able to pass F2 well.
I watched the lectures thrice to solve this question however I get confused in the part where we have to count with fingers. Isn’t it suppoed to be 11years for the 2nd receipt (4-11yrs using the fingers for 8 years)?
I deducted 1-3yrs from 1-11yrs to get 4-11years. I’m so confused.
But the question you typed specifically says “in years four to eight”.
It does not say that the first receipt is in 4 years time and there are 8 years of receipts. If it had said that then it would have been from years 4 to 11 and you would then have done what you have written in your latest post.
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