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Sir in march 20 Qs, it was written in the Qs that “If the board accepts the engineers’ proposal, Hathaway Co would need to submit an application to the relevant regulatory authority. It is expected regulatory approval would be granted in one year’s time. Manufacturing and sales would commence immediately after being granted regulatory approval. An investment in plant and machinery of $12m will be required as soon as regulatory approval has been granted.
So if we look at examiners answer He has taken contribution, cost etc from Yr 2 onwards and Investment in Yr 1, and this I understand that as the approval would be granted in one year’s time…
However, if we see in S18 Q1, it is mentioned in Qs that It is intended that the
project will commence in one year’s time. But here examiner has taken cash inflows from Yr 1 onwards and Investment at Yr 0. And this time I do not understand why he has done so? This contradicts with above QsUsually we assume that the initial investment is at time 0.
Hathaway has taken it as being at time 1 because the investment is in one years time and more importantly that one of the alternatives is to sell immediately i.e. at time 0.
But sir then in S18 Q1 also, project will commence in 1 year’s time so the investment should be at year 1 in line with the treatment of march 20 Qs. As in both the questions the investment would be in 1 year’s time so either we should take investment in both these questions at yr 1 or we should take investment in both these questions at yr 0, but why in 1 question examiner has taken investment at Yr 0 and in the other Qs examiner has taken investment at Yr 1. What is the reason for the difference? Because project in both Questions will commence in 1 year time as mentioned in Qs.
Regardless of when it starts we usually let the initial investment be at time 0.
However because within the question Hathaway one of the alternatives is to sell immediately then time 0 has to be the same for both alternatives. So selling immediately is therefore time 0 and investing in one years time is time 1.
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