In the question pertaining to furlion Co, they have taken the pa(value of underlying asset) as 15m discounted at 12 percent for 3 years.
They have also mentioned that the NPV of expanded project is estimated at 0.
So shouldn't Pa be the value that when discounted at 12 percent becomes 15 so as to make NPV 0?
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Furlion Co(mar-june 16)
4y ago#1No, Pa is the discounted value.
I have an understanding gap here.. how is it so?
4y ago#3If the NPV is 0, then the PV of the returns must be equal to the PV of the investment of 15m in the 3 years time.
Therefore the PV of the returns must be equal to the PV of 15m discounted for 3 years,
If PV is discounted for 3 years at current value, then it comes to around 10.68mn.. which makes the NPV negative.. 15Mn (investment) -10.68mn (returns). The. NPV would be negative 4.32mn. right?
4y ago#5The PV now of the investment of 15M is $10.68.
The NPV now is zero.
Therefore the PV of the returns must be 10.68M (and is Pa).
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