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Hello.
Can anyone explain on how to get the terminal value of GBP8,915,309?
From my knowledge, the calculation should be GBP6.2m x 1.08^6 = GBP9,838,620…
Any assistance would be much appreciated. Thank you.
First, because the value is increasing at 8% in real terms (i.e. ignoring general inflation), the actual rate of increase will be higher. It will increase by 10.7% p.a. ((1.08 x 1.025) – 1)
Secondly, because note 1 of the question says that construction costs are paid at the end of the year, there is will only be 5 years inflation at 10.7%
Finally, note 3 in the question says that there is a charge for repairs and renewals payable on disposal of 1.2M quoted at current prices.
So…the net amount is (6.2M x 1.107^5) – (1.2M x 1.025^6)
which is 10306941 – 1391632 = 8915309
A horrible exam question 🙂
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