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IT is from DEC 2012 Arbore co, in question it is said that PDur 05 annual operating cash flow commence at the end of year 4 and last for the period of 15 years ,I think total cash inflow should also be multiplied by 15 since it will last for 15 years as said in the question,but in the answer written by ACCA did not multiply the annual cash inflow by 15 as shown below,I want to know why did ACCA did this or this is only the way to do,if this is only the way to do then please explain me why?
Annual sales revenue = $14 x 300,000 units = $4,200,000 Annual costs = $3,230,000 Annual cash flows = $970,000
Net present value of PDur05 = ($2,500,000) + ($1,200,000 x 1•11–1) + ($1,400,000 x 1•11–2) + $970,000 x 7•191 x 1•11–3 = ($2,500,000) + ($1,081,000) + ($1,136,000) + $5,100,000 = $383,000You cannot simply multiply by 15!!
Each flow needs discounting.
Because it is an equal annual flow, we use the 15 year annuity discount factor. However this would give the present value of the flow started in 1 years time. In this case it starts in 4 years time (which is 3 years later), so we need to discount for a further three years (using the normal discount factor for 3 years) in order to get a present value.
(If you are still confused about annuity factors then it would be worth watching the Paper F2 discounting lectures).
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