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Hey, john sir, question again….
A company’s cost of capital is 12% per annum. A project will involve the hire of two equipments A and B as follows:
Equipment A will be hired at a cost of $56000 per annum for six years. payments will be made annually in advance.
Equipment B will be hired at a cost of $40000 per annum in perpertutity. payments will be made at the end of each year.
Q: calculate the present value (to the nearest $’000) of hire costs.For A, it is 56,000 immediately – so present value of this is 56,000.
Then it is 56,000 per annum for 5 years, so multiply by the 5 year annuity factor at 12%For B, simply multiply by the discount factor for a perpetuity – 1/r, which is this case is 1/0.12
I still do not understand the solution for A…would you please explain more details for me?
i mean, why it is 56000 immediately?Because it says that payments will be paid annually in advance.
So the payment for the first year will be paid at the start of the year, which is now (i.e. immediately). The payment for the second year will be paid at the start of the second year – i.e. in one years time, time 1. And so on…
Okay,i got it, thank you very much for you patience and great answer!!
And i have another question, please help me…
A two year project has the following annual cash flows:
Initial costs:$400000
12 months later:$300000
24 months later:$200000
The cost of capital is estimated at 15% per annum during the first year and 17% per annum during the second year, what is the net present value of the project?For the 300,000 in 1 years time, you multiply by the discount factor for 1 year at 15%.
For the 200,000 in 2 years time, you multiply by the discount factor for 1 year at 17% and then multiply by the 1 year discount factor at 15%.
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