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Discounted Cash Flow

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Discounted Cash Flow

  • This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • May 4, 2018 at 6:39 pm #450114
    nzrn89
    Participant
    • Topics: 37
    • Replies: 15
    • ☆☆

    Hi Sir. I have a question.

    What is the amount to be invested today to receive $2,000 per annum for 9 years starting with the first receipt beginning in 4 years’ time. The interest is assumed to be 5% per annum.
    A. $10,600
    B. $11,200
    C. $11,700
    D. $12,200

    The answer is B which is (AF 5% 11 years – AF 5% 3 years) x $2,000 = (8.306 – 2.723) x $2,000 =$11,166 (nearest is $11,200)

    But shouldn’t the answer be C sir?
    (AF 12 years – AF 4 years) x $2,000 = (9.394 – 3.546) x $2,000 = $11,696 (nearest $11,700)

    Thank you sir.

    May 5, 2018 at 9:01 am #450176
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54759
    • ☆☆☆☆☆

    Assuming that you have copied everything correctly, then neither answer is correct!

    The first receipt is in 4 years time. There are 9 receipts in total, so the last receipt is in 12 years time.

    Therefore we need the total factor for years 4 to 12. We get this by taking the total factor for 1 to 12 (the 12 year annuity) and subtracting the total for 1 to 3 (the three year annuity).
    So: (8.863 – 2.723) x 2000 = 12,280

    Do check that you have copied the question correctly.

    (And do watch my free lectures on this. The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.)

    May 5, 2018 at 9:07 am #450183
    nzrn89
    Participant
    • Topics: 37
    • Replies: 15
    • ☆☆

    Thank you so much sir! Brilliant!!

    Yes i copied the question correctly. Unfortunately the suggested solution and my understanding was wrong at the beginning.

    But now I have fully understood

    Thanks so much! 🙂

    May 5, 2018 at 9:28 am #450197
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54759
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Discounted Cash Flow’ is closed to new replies.

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