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An investment of $120,000 on 1 April 20X6 is forecast to yield a net cash flow of $14,000 each year for four years commencing on 31 March 20X8, followed by $20,000 each year in perpetuity. The appropriate cost of capital is 8% per year.
What is the positive net present value of the investment at 1 April 20X6 (to the nearest $1,000)?
Select one:
$80,000
$81,000
$93,000
$110,000sir can you please explain me this qstn as i confused when solving this qstn..
The 14,000 a year for 4 years is an annuity and therefore discount using the 4 year annuity factor at 8%. However since the annuity starts 1 years late (at time 2 instead of at time 1), the answer needs discounting for 1 year at 8% to arrive at the PV now.
For the perpetuity of 20,000, the discount factor is 1/0.08 as normal. However since it starts 5 years late (at time 6 instead of at time 1) the answer needs discounting by 5 years at 8% to arrive at the PV now.
I think it may help you to watch the Paper MA lectures on investment appraisal because this is very much a Paper MA level question.
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