Time Time Time Time
0 1 2 3-10
C/F (600) 110 (190) 158
11%d/f 1 .901 .812 .812
11%a/f 5.146
PV (600) 99.1 (154.3) 660.2
NPV =$5m.
This is one of the question in technical articles "Using real options when making financial strategy decisions". My doubt is for time 3-10 the C/F entered is 158, so is that per annum or total C/F from 3rd year to 10th year is 158$.
Secondly how did they arrive at 660.2m PV for time 3-10 and why is 5.146 used as A/F and .812 used as d/f for time 3-10.
Please help me with this one.
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4y ago#1The 158 is per annum.
There are 7 years of flows and so we use the 7 year annuity factor of 5.146. However because the annuity starts 2 years later (at time 3 instead of time 1) we then need to discount the result for 2 years at 11%.
So the PV is 158 x 5.146 x 0.812 = 660.2
Okay understood, but 5.146 is 8th year annuity factor, not the 7th year annuity factor.
4y ago#3My mistake. Flows from time 3 to time 10 are a total of 8 years :-)
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