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Z Co is evaluating a project which will generate cash flows of $2,600 each year in years four to
eight. (The first amount will be received in four years from now.)
What is the present value of the project cash flows using a discount rate of 14%?There is more than one way of calculating the answer to this question.
Here is one method:
$2600×4.639=12061.4
4.639 is annuity for 8 years at 14%.$2600×2.914=$7576.4
2.914 is annuity for 4 years at 14%.
$12061.4-$7576.4=$4485$4485 is present value of cash flows at this discount rate.
Almost, but not quite.
You should take the 8 year annuity factor and subtract the 3 years annuity factor (not 4 year) – this will leave you with 4 to 8 inclusive.
(Daniel: I suggest you watch the free lecture on discounting where I go through examples like this.)
Sir pls if i may ask, in one of your lectures, u made mention of sometin like this!! That since it started from 4 yrs to 8, u count frm the 4th yr to get your 4yrs and in counting it will be on the 7th year.pls can u verify it for me? Maybe i made a mistake in understanding it.
thanks!!!We should take note that first amount is from year 4, so we can not use year 8 directly in our calculation as it does not start from year 1. Here we will subtract annuity of year 8 from year 3.i.e
Annuity for Year 8 @14%=4.639
Annuity for Year 3 @14%=2.322
Difference=2.317
Present value =2600*2.317=6024.2Daniel:
If you want me to answer then please ask in the Ask the Tutor Forum in future.
What Wemimo has written is correct, although I am not sure that is what you are referring to.
What I think you misunderstood was a question where an amount was received in each of 4 years, with the first receipt being in 4 years time.
In that case, the receipts will be in 4 year, 5 years, 6 years, 7 years. So the last receipt will be in 7 years time. (i.e. years 4 to 7)Hi wemimo,I could not understand. Could u plz explain y hv u taken 3 years instead of taking 4 years?
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