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Hi Tutor,
In ref to the past year paper stated, in Q2b, could you please explain the concept behind the calculations:
Mar 12: why in the first year, the PV discounted taken as Y2?
While in Mar 13, PV discounted as 1.2 x (1/1.06)power1?Thank you
Hi,
The total revenue is to be received at the end of the three year period, so at the end of the first year (March’12) there are two years left until the end of the contract so we discount the amount invoiced by two years as that is when we will be receiving it.
Similarly at the end of the second year there is one year until we receive the last installment so we discount it back by one year.
It is tricky but you need to give particular attention to when the cash is received as well as the invoice date.
Thanks
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