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Hello Sir,
How are you,
I have some inquiry about the items which we have to consider in the lease or buy inflows and outflows.
why the interest payments not included in the calculation of the present value since this interest on the loan is applicable to this investmentas well as the loan installment is a part of the investment outflows.
So theoretically, why these are not included ,how can we determine the things which are to be included and the one not.
Thanks,
We never include interest payments in present value calculations. The whole point of discounting is to account for the interest – to include the interest payments in the cash flows would be accounting for it twice. If you are unsure about this then watching the Paper MA lectures on discounted cash flow will help you.
When buying, then how the initial investment is repaid is irrelevant because the only reason the total repayment will be greater than the amount initially borrowed is because of interest, and again interest is accounted for by discounting.
Have you watched my free lectures on this? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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