Lignum BPP 69

The question actually says that development will take 3 years following which it will have a market life of 12 years. The answer does not take 12 - 3 at all. You either take the 15 year annuity factor less the 3 year annuity factor or You take the 12 year annuity factor and multiply by the ordinary 3 year present value factor (because the annuity starts 3 years late - at time 4 instead of time 1). Both approaches give the same answer (apart from rounding, which is irrelevant), and I explain them in my lectures. The BPP answer has taken the second approach.

I meant to say 12 years, not 3 in sentence 1. it was 4;30 am the answer takes 1-12 and then still deducts 3

Dear Sir I think I have it now...sometimes you have to sit and do nothing for a few hours....Am i correct in assuming that the developmental cost to get to the stage of being able to spend more must be less than the call option? The actual value of the developmental cost has nothing to do with the present value of the inflows and the cost in 3 years to do whatever you are going to do is not subject to any discounting or inflation as that is all somehow in the formula somewhere?????? Regards

If you are referring to the calculation of PV of 36.79, then the answer certainly does not take 1 to 12 and deduct anything. The answer does exactly what I have written in my previous post.

Dear Sir You are right, of course you are right..i mean i worked it out.. that method of the 12 year annuity factor by the 3 year pv is very nifty and the rest of my assumptions are therefore correct??

Yes they are correct, and you are welcome :-)