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John Moffat.
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Saimon
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Question b (i)
Sir
Normally i calculate the AF of 4-15 year by
1st calculating AF for 15 year and then calculate AF for 3 year and after that deduct the 15 year AF by 3 year AF
In the answer they have calculated 15 year AF and then discounted it with year 3 DCF.
my question is why they have discounted with year 3 DCF shouldn’t it be discounted by year 4 DCF???
And
Can you please show me the AF Calculation in my way of calculating AF because answers are coming different and i can not find where i have made the mistake????
John Moffat
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I have told you before that I do not have the Kaplan Kit (only the BPP Revision Kit). However Arbore is a past exam question and I do have the past exams.
The flows for project PDur05 are not 4 to 15. The question says that the first flow is at time 4 and that it lasts for 15 years. Therefore the flows are from 4 to 18.
To discount, you can subtract the 3 year annuity factor from the 18 year annuity factor. However, this would mean calculating the 18 year annuity factor yourself using the formula, because the tables only go up to 15 years.
Alternatively, take the 15 year annuity factor (because there are 15 years of flows) and multiply by the normal 3 year present value factor. The reason is the the annuity factor gives the PV for flows starting in 1 years time. Here the flows start in 4 years time which is 3 years late. Therefore we need to discount for 3 years to get to the PV.
Both approaches would give the same answer (apart from a rounding difference due to the tables being rounded to 3 d.p’s, but rounding is irrelevant for P4).
Saimon
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