Hey John, Hope you are doing well.
I have a query. In this question, the Initial invesment of expansion is given as $15m, denoted by Pe in the BSOP model formula. The present value of returns, which I donate by Pa, its amount however is calcualted by multiplying the $15m with the 3 year discount rate of 0.712. I understand from where we get the 15m amount that is to be multiplied with the discount rate, but I don't understand why we are discounting it.
Can you please explain this along with any indicators in the question that I must look for and realise quickly that I must discount the value. Because the values have not been discounted in any of the previous BSOP questions which i have done apart from this one. This is the first.
Thank you
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2y ago#1The wording of the question is slightly confusing (but is correct).
When it says that the expected NPV of the expansion is estimated to be $0 it is meaning that the NPV in 3 years time is estimated to be $0. So $15M is the PV in 3 years time of the future inflows. For Pa we need the PV 'now' and so we need to discount it for 3 years.
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