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Hello,
Hope you are doing well, and thank you for taking the time to help answer questions on this platform.
I am writing regarding part (a) to the question ‘Verge’ in the BPP Revision Kit. I am reading over the solution to this part and there are 2 things I really don’t understand in the answer written in the revision kit:
1. Why is the calculation for the revenue recognized for the year ended 31st March 2002 put as ‘ 1.8 x (1/1.06^2) ? I don’t understand why the discount factor of 6% is to the power of 2, as this is the end of the first year of the contract (1st April 2001 inception -> 31st March 2002) therefore the discount factor for this calculation should be ‘ 1/ 1.06 ‘. What am I missing here?
2. Why is the calculation for the revenue recognized for the year ended 31st March 2003 put as ‘ 1.2 x (1/1.06) ‘ ? I thought here the discount factor would be ‘ 1/1.06^2 ‘ as it’s the end of the second year of the contract?
In my mind I have the contract starting on 1st April 2001 and going for 3 years to 31st March 2004 so reporting date of 31st March 2002 is only the first year of the contract; 31st March 2003 is the second year and 31st March 2004 is the third and final year.
Much appreciated
I think this question has been tampered with since it was originally written. It has too many numbers for a real exam question.
If it repeated in the exam most marks as always would be for explanation. The key points to explain are that you are (sort of) offering finance to the government, and that they may need a PPA.
2 marks maximum for calculation, largely given for approach. So if you show evidence of the need to discount you would pick up 1 or 2.
Bear in mind that explanations have to be clear but calculations just need to be (sensibly) attempted.
So don’t spend days trying to unravel the BPP solution.(in future please note that the thread title should indicate a topic rather than a question name – e.g. does revenue need to be discounted and why?)
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