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In this question solution they added 1 to DF. why is that so?
They have give 5 years advance cash inflow cost of capital is 10% and 15%. so according to annuity table DF should be 3.791 but they took 4 years DF that is 3.170 and added 1 to it.
The cash flows are in advance and so are from time 0 to time 4.
The 4 year annuity factor discounts flows from time 1 to time 4. So we also need to add on the PV of the flow at time 0, which is 1 x whatever the flow is.
If you are still unsure, then watch the Paper MA lectures on discounting, because there is nothing extra in Paper FM (the main problem in Paper FM is arriving at the cash flows in the first place 🙂 )
OK thank you 🙂
You are welcome 🙂