BPP Practice and Revision Kit. Question 150 Warden

You can do it either way and the answer will be the same (apart possibly a rounding difference, but rounding does not lose marks in the exam). If (for example) there is an annuity from years 2 to 5 then the two ways are either: Take the 5 years annuity df and subtract the 1 year annuity. or Multiply by the 4 year annuity df (because there are 4 years of flows) and then multiply by the normal 1 year df (because the annuity starts 1 year later). Again, apart from possible rounding differences in the tables, you will end up with exactly the same answer.

i also have same issue , same question warden dec 11 Q1 project 5 yrs .. . tax one year in arrears. PV of sales 1600 x 3.696 (5yrs) = 5913.6 tax 1600 x .3 = 480 x3.33 (annuity 6 -1 ) =( 1598.4) =4315.2 this one correct ? examiner answer The PV of sales revenue = 100,000 x 16 x 3·696 = $5,913,600 The tax liability associated with sales revenue needs be considered, as the NPV is on an after-tax basis. Tax liability arising from sales revenue = 100,000 x 16 x 0·3 = $480,000 per year The PV of the tax liability without lagging = 480,000 x 3·696 = $1,774,080 (Alternatively, PV of tax liability without lagging = 5,913,600 x 0·3 = $1,774,080) Lagging by one year, PV of tax liability = 1,774,080 x 0·901 = $1,598,446 After-tax PV of sales revenue = 5,913,600 – 1,598,446 = $4,315,154

It is correct - both approaches give the same answer, and you can do it either way!! (the small rounding difference is irrelevant in the exam)