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Dear Tutor,
Please explain the difference between a ‘T’ and a ‘Year’ in investment appraisal and which I should use in the NPV calculation.I do understand where to put the cash flows (example: current price terms means today), the only doubt I have is naming the period.
Can ‘T0’ and ‘Year 0’ be used to represent ‘today’?
Going on, can ‘T4’ and ‘Year 4’ be used to represent the end of the fourth year?Please note the excerpt below before answering my question (extracted from the “Advanced Investment appraisal” technical article from the ACCA website).
THE EXCERPT:
“Before going further students must understand the difference between a ‘T’ and a Year. A ‘T’ is a point in time and hence T0 is now and T1 is in one year’s time. A Year is a period of time and hence Year 1 is the period between T0 and T1 and Year 2 is the period between T1 and T2. Please note T1 is both the end of Year 1 and the start of Year 2.”With investment appraisal we refer to time periods as T
T0 is today, so what happens at the start of the project or appraisal
Their could be buying a machine and say working capitalThen T1 is the end of the first year and the start of the next….. so revenue and costs for the first year
Then T2 is the end of the next year so revenue and costs for the second year and so on
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