NPV and Perpetuity question

Hi Ok so Im assuming you are happy with the first cashflows yr 0 1million outflow x 1 = (1,000,000) y1 100,000 inflow x 0.909 = 90900 y2 200,000 inflow x 0.826= 165200 The final bit the perpetuity from year 3 onwards.. will be added to the above. Perpetuity would be calculated as 250,000/0.1 = $2,500,000 But this assumes there will be a receipt in year 1 and year 2 - if this isn't the cas we need to deduct the present value of year 1 and 2 receipts from the total present value of the perpetuity $ 2,500,000 less yr1 no receipt 250,000 x 0.909 = (227,250) y2 no receipt 250,000 x 0.826 = (206,500) The value of the perpetuity will be $2,066,250 Add this to the NPV set out above should come to yr 0 1million outflow x 1 = (1,000,000) y1 100,000 inflow x 0.909 = 90900 y2 200,000 inflow x 0.826= 165200 yr 3 onwards 250k delayed perpetuity = 2,066,250 NPV will be $1,322,350 Hope that explains ok Kind Regards Cath

Hi there - good question & I understand what you mean. However, remember for a CIMA exam - there are restrictions on the type of calculators you can take in with you - so one that calculates TMV or NPV is probably not permitted... check with the CIMA website for this. In terms of the rounding - you can generally use the discount tables provided in the exam ( those factors themselves are rounded - but this is something the exam writers are aware of). Either they will write the questions in a way that rounding can't cause an error eg by giving you multiple choice options to choose from. Alternatively a small range of permissible final value answers will be accepted ( to allow for rounding). Hope that helps.