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Sir in Q4 . Arbore Co. Dec 2012 the question states that the project inflows will start at yr 4 ‘s end and last for a total of 15 years.
Accordingly i took the annuity at 11 % for 1-15 years and subtracted annuity for year 3 from it . But to my suprise the examiner as taken annuity for 1-15 years but insteas of subtracting ,he has * with present value at year 3 at 11 %cant understand this basic variation by the examiner
Two things.
Firstly you have treated it as though the first flow is in 4 years time and the last flow is in 15 years time. However that it not the case – the first flow is indeed in 4 years time, but because it lasts for 15 years, the last flow is in 18 years time (so that there are 15 flows in total).
Secondly, to get the discount factor for 4 to 18, you can do it in either of two ways.
One way is to take the annuity factor for 18 years and subtract the annuity factor for 3 years. This is the approach you were using, but the only problem is the tables only go up to 15 years and so you need to calculate the 18 year annuity factor yourself.The other way is to take the annuity factor for 15 years (because there are 15 flows) and then discount for 3 years (using the ordinary discount factor for 3 years) because the annuity starts 3 years late (at time 4 instead of time 1).
Both methods will give the same answer (apart from rounding differences which are irrelevant for the exam).
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