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Dear tutor,
in one of the answers of BPP revision kit there is such a proposition: “Duration measures the time required to recover approximately half of the project’s weighted average present value.” I can’t understand why half and not all?
I hate it when I read that because to be honest I think that they have just copied it from somewhere 🙂
It is certainly not all of it (for it to be all of it then it would be the discounted payback period and you can check for yourself that this is not the case).
It does actually turn out to be approximately half, but to explain why would mean a lot of proving and that certainly is not required in the exam (and I am sorry but I am not going to prove it for you here – I would be typing all night 🙂 )
Thanks. I have another question. I can’t undestand what advantage duration has in comparison with discounted payback.
Although it can be calculated for an investment, the real relevance of the duration is not for project investments, but for bonds. The shorter the duration, the less sensitive the market value of the bonds will be to changes in interest rates.
To see what I mean look at the examples in the Course Notes.
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