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Hello,
for part a)
When calculating the present value for year 5 onwards, why is the discount factor 0.683 ?
Since it is for year 5, shouldn’t it be 0.621 ?
ThanksHad the flow been from time 1 onwards then the formula would have given the PV at time 0.
Here the flow is from time 5 onwards, which is 4 years later, and so the formula gives the PV at time 4 (i.e. 4 years later as well). So to get the PV ‘now’ we need to discount the result for 4 years.
(I do cover this point in my free lectures 🙂 )
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