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John is assessing in project in which first 3 annual lease payment has been agreed by $120,000 with first payment made at start of year 1 and subsequent payment will rise by 5%. John real cost of capital is 2% and general inflation is 3%
What is the present value of John second last payment?
You must have an answer in the same book in which you found the question, and you should therefore ask about whatever it is in the answer that you do not understand!
The start of the first year is ‘now’ time 0.
So the payments are 120,000 at each of time 0, time 1, and time 2.
You need to inflate the payments at times 1 and 2 for one year and two years inflation at 5% respectively to get the nominal cash flows.
You need to use the formula to calculate the nominal cost of capital, and then discount at this rate.
All of the above is covered in my free lectures. Are you watching the lectures?
Year
0-120,000
1-120,000*1.05
2-120,000*1.05^2
I calculated all and discounted it to nominal discount rate: 5.06% and then calculated PV but my answer does not matches.
Well your flows and your discount rate are correct, so I have no idea why your answer does not match!
Do note that the question as you have typed it does not ask for the total PV, but ‘the PV of the second last payment’ (which is dreadfully worded if that is actually how it was written).
Without seeing the actual question and answer then I really can’t say any more.
If it is a past exam question or a question in the BPP Revision Kit, then tell me which one and I can look at the actual question myself.
It is question from this link. I was practising and yes I identified 2ns last payment. I have no idea what is error.
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