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Dear John,
Regarding the offer of $28m at the start of year three, the answer:
Pa=30.6m – it is not the present value from year 3 to year 5, it does not consider the time value, only the cash flow.
Pe=28mMy answer is
Pa=9,946.5+7,064.2+2,343.9=20.6m
Pe=28/1.12/1.12=22.3mCould you explain the logic? what is the right way to estimate Pa and Pe?
Thank you,
LilyPa is the PV from year 3 to 5. You have forgotten to add on the PV of the land, buildings and machinery and the PV of the working capital.
Pe is the exercise price of 28. We do not discount it – the term with ‘e’ in the formula is effectively doing the discounting as I explain in my free lectures.
You can find lectures working through the whole of this question linked from the following page:
https://opentuition.com/acca/afm/afm-revision-lectures/
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