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Hi John,
I would like to know why the discount factor for 2012 is 0.909 instead of 1? I thought the construction is commencing in Jan 2012 and it didn’t say that the costs will only incur at the end of the year.
Thank you.
You are correct – the question does not say end of year, and it is an assumption (as always with P4, there is hardly ever one ‘correct’ answer – it depends (as in real life) on what assumptions are made.
The assumption here is actually a sensible one. Since we are constructing (as opposed to simply paying for a machine or whatever) it is likely that the costs will be incurred throughout the year (rather than as just one lump sum for the year). So they have been treated in the same way as we treat operating costs – i.e. assumed they occur at the end of the year (because discounting if they were spread throughout the year would be over-complicated).
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