Capital budgeting

The flows are from time 2 to time 6. So take the annuity factor for 6 years and subtract the factor for 1 year, so as to be left with the factor for years 2 to 6. Alternatively you can take the annuity factor for 5 years (because there are 5 years of flows) and multiply by the 1 year factor to discount an extra year (because the annuity starts 1 year later - at time 2 instead of at time 1). The two answers will be slightly different, because of rounding in the tables. However in the exam they never ask to the nearest $ (more like to the nearest $100) so that rounding is not a problem :-)

Sorry, have read the question again, the cash flows are from years 2 to 7. (There are 6 years of flows - one in 2 years time and then another 5 years). The first method gives a discount factor of 4.868 - 0.909 = 3.959 Therefore the PV of the inflows is 20,000 x 3.959 = 79,180. Therefore the NPV is 19,180. The second method is 20,000 x 4.355 x 0.909 = 79,174 Therefore the NPV is 19,174 As I wrote before, the difference is just due to rounding in the tables and will not be relevant in the exam.

You are welcome :-)