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Below is what I understood from the the question ( Lingium Co. ) and would like you to correct if my interpretation is wrong :
So , the Q/s says the development phase will take 3 years – that would be Year 0 Year 1 and Year 2
Following which the machinery has a market life of 12 years.
Now the annual inflows of 6 million will continue for a total of 12 years which means it starts from Year 3
While discounting this annuity to present value, i got the same annuity factor as per the kit. However while again discounting back to Year 0 arent we supposed to discount using DF of 1/1.0769^2 instead of 1/1.0769^3 considering the 3rd year’s discounting has already been incorporated ?No. If it takes three years to complete, then the first year of operation will be the fourth year.
Suppose time 0 is 1.1.2017, then it will be complete on 31.12.2019, which is 3 years later i.e. time 3. The first income will arise during year ended 31.12.2020 and as always we assume it comes on the last day of the year, so 31.12.2020 which is time 4.
Remember that we are not really talking in terms of years, but points in time that are 1 year apart.
So 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.
Time 3 is the end of the third year/start of the fourth year.
And so on 🙂(In future, please ask in the Ask the Tutor Forum if you are wanting me to answer. This forum is for students to help each other.)
Thanks a ton for clearing that up !!!! 🙂
(Sorry didn’t realise this was the wrong forum )
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