- This topic has 1 reply, 2 voices, and was last updated 1 year ago by
.
- Posts
Dear sir, today I was practicing a past exam question number 4 of year 4th Dec 2012. Here I got stuck at one part.
As per the question they have mentioned that “PDur05 project’s annual operating cash flows commence at the end of year four and last for a period of 15 years”.When I checked the solution they have done like this:
“970,000 × 7.191 × 0.731”Here 0.731 is a discount factor for year 3 at 11% return.
My question is that, if they have mentioned that operating cash flows commence at the end of year 4 then there should be discount factor of year 5 because end of year 4 is start of year 5.Using year 3 discount factor would have been fine if the question stated that cash flows commence at the start of year 4 which is year 3.
I think there is a mistake from publisher. Can you check and let me know.
Thank you very much.There is no mistake.
The cash flows start in 4 years time and last for 15 years.
Had they started in 1 years time and lasted for 15 years, then multiplying by the 15 year annuity factor would have given the PV ‘now’, i.e. at time 0.
Here, the first flow is in 4 years time, which is 3 years later than starting in 1 years time. Therefore using the annuity factor gives a PV 3 years later, i.e. at time 3 instead of at time 0.
So we need to discount for 3 years to get the PV at time 0.
- You must be logged in to reply to this topic.