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good afternoon!
i think this will be more of an annuity question.
in an asset replacement question, the maintenance costs are 6000/yr for years 1,2 and 3. and in years 4,5,6,7 and 8 the costs are 8000/yr. cost of capital s 20%
so, pv of the first 3 yrs is no problem.
for years 4-8, my reasoning was:
a. compute pv at T3 first
b. then bring this pv to T0so, following this i did:
PV@ T3 = 8000 x 3.837 (AF 8 yr/20%)
then, to bring it to T0, i didPV@T0 = (8000 X 3.837) X DF@ T3 = (8000 X 3.837) X 0.579
3.837 x .579 = 2.221
the answer simply took the AF for a 5 year annuity (2.991) and multiplied it by 8000
can u pls explain where my thinking is going wrong?
thank you
If the flow is for years 4 to 8, then there are 5 years in total.
If it were 1 to 5 then you would multiply by the 5 year annuity factor and this would give a PV at time 0.
Because it is 4 to 8, multiplying by the 5 year annuity factor will give a PV at time 3 (everything is 3 years later) and so then you need to multiply by the normal 3 year discount factor.The alternative way is to take the 8 year annuity factor (which is 1 to 8) and subtract the 3 year annuity factor (which is 1 to 3). This leaves you with a factor for years 4 to 8.
Both ways give the same answer (apart from rounding because the tables are rounded to 3 places, but this is irrelevant in the exam).It will help you to watch the Paper F2 lectures on interest and investment appraisal, because this is revision of F2.
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