Blipton Dec'08

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 :-)