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Sir, I watched your lecture but I’m unable to understand the logical explanation behind the “Year & Time” which I hope are two different things under Lease & Buy NPV questions in chapter 9 (example 3). I am having trouble with only the timing of the cash flows.
Lease payments are payable at the start of each year
[start of each year always mean Year 0?]Tax which is payable one year after the end of the financial year
[one year after the end of the financial year always mean Year 1?]If the machine is bought, it will be bought on the last day of current financial year
[last day of current financial year always mean Year 0?]Payable at the start of each year AND Payable at the end of each year
[Payable at start of each year means Year 0 AND Payable at end of each year means Year 1]All these are baffling problems because I don’t understand their logic! Please help.
0, 1, 2 etc are not years. They are points in time that are 1 year apart.
Time 0 is the start of the first year.
Time 1 is the end of the first year/start of the second year
Time 2 is the end of the second year/start of the third year
and so on.As I explain in the earlier lectures on investment appraisal, we always assume that operating flows are at the ends of years unless told otherwise. Have you watched the earlier lectures?
In answer to your specific questions:
If lease payments are at the starts of years, then the first payment is at time 0, the second payment is at time 1, and so on.
If tax is payable one year after the end of the financial year, then the first year ends at time 1 (which is when the tax is calculated) and the first tax is therefore payable at time 2.
If the machine is bought then it is bought ‘now’ which is time 0 (the last day of the current year/first new of the first year of operation).
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