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Hi tutor
In this question, while calculating the APV of Bihari project, annuity factor for T6-T15 is taken on 11% for 10 yrs=5.889 instead of (T1-T15)-(T1-T5) 7.191- 3.663 =3.528
Plz explainThe examiner has actually explained what he has done (immediately below the NPV calculation)!!
You can deal with in two ways.
Either you do as you have written (although you have read the 5 year annuity factor wrongly – it is 3.696, and therefore the factor for T6-T15 is 7.191 – 3.696 = 3.495Alternatively you can do what the examiner has done. Take the 10 year annuity (because there are 10 years of flows) and then multiply by the ordinary 5 year discount factor (because the annuity starts 5 years late – time 6 instead of at time 1)
This gives: 5.889 x 0.593 = 3.492(The tiny difference is due to the fact that the table figures are rounded to 3 decimal places, and is not relevant in the exam.)
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