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Hello Tutor,for PYQ Dec 2014 Q1 part (c) (ii)
I don’t understand the expected present value pf project with the offer from Lumi Co calculated by the examiner
Why the Fugae Co exercise the offer made by the Lumi Co,the examiner still included the (0.8* 61545)+(0.2*24618)=54159688 which respectively is the PV year 2 to year 4 and 40% PV year 2 to 4?
Can I use the PV $50m (offer price) to include in the 75% probability with year 1 PV of 2926000?
Thank you
Lumi would be buying the project at the start of the second year. The question says that even if the industry grows in the first year there is still a 20% probability the growth sill slow down in the 2nd and subsequent years i.e. time 2 to 4.
No – you cannot include the offer price in the 75% probability – either we let them pay us $50M or we don’t. .
Then why the PV of $50m = $44,650,000 is included in the 25% probability in the examiner answer?
I don’t understand.You can find lectures working through the whole of this question linked from the following page.
https://opentuition.com/acca/afm/afm-revision-lectures/They should sort you out 🙂
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