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Dear Sir,
When calculating the NPV of Project Dur05 my answer differed from the model answer. But I am not quite clear why.I had a negative NPV as opposed to a positive. I found that the difference emanates from the discount factor.
Net cash flows is 970
my treatment:
11% annuity factor for 15 years 7.191
less 11% annuity factor for 3 years 2.444
this equals 4.747so the PV of the cash flows would be 4.747 x 970 = 4605
PV of investment face is = 4718 giving a negative NPV of $113I have no issue with the net cash flows and pv of the investment.
The answer has a different discount factor: The examiner uses
7.191 x 0.731I understand that 0.731 is the discount factor for 11% at year 3. but this is not consistent with my answer because 7.191 x 0.731 x 970 = 5099. This gives a positive NPV of $381
Any time I used the above approach for a delayed annuity I always found the right answer. But not this one. Is the examiner’s approach not the same as mine?
Please help
Kind regard
You have misread the question.
You have assumed that the cash flows are from 4 to 15.
However the cash flows last for 15 years, and so they are actually from 4 to 18.To get the discount factor, you can either use your approach and take the 18 year annuity factor less the 3 year annuity factor (but this would mean using the formula for the 18 year annuity because the tables do not go far enough),
or, you can do as the answer has and take the 15 year annuity factor and multiply by the normal 3 year factor (because the annuity starts ‘3 years late’).Either way would then give the same answer.
Ooh Dear!!!
Thank you so much. Such a relief!
Thanks again.
But it is such a big ask to spot these in an exam situation.
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