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cash flows

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › cash flows

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • July 29, 2021 at 2:05 pm #629787
    rishabbohra98
    Member
    • Topics: 112
    • Replies: 88
    • ☆☆☆

    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.

    July 30, 2021 at 9:54 am #629833
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51585
    • ☆☆☆☆☆

    The 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

    July 30, 2021 at 10:18 am #629845
    rishabbohra98
    Member
    • Topics: 112
    • Replies: 88
    • ☆☆☆

    Okay understood, but 5.146 is 8th year annuity factor, not the 7th year annuity factor.

    July 30, 2021 at 2:16 pm #629861
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51585
    • ☆☆☆☆☆

    My mistake. Flows from time 3 to time 10 are a total of 8 years 🙂

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