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Hello Sir,
Can you please explain postponing projects with brief example illustrating how the loss in NPV is calculated ?
Thank youPostponing projects it not a separate topic and so I cannot give you a rule. You will have to be more specific with an example that is causing you a problem – I will then explain how to deal with it.
(Having the right to delay projects certainly is a separate topic, but it is option pricing and is not examinable until P4)
If any project, A, B or C, were delayed by one year, the ‘NPV’ would now relate to year 1 values, so that in year 0 terms, the NPVs would be as follows.
NPV inYear0 NPV in Year 1 Value Loss in NPV(a) Project A 5,700*1/1.10 = 5,182 518
(b) Project B 3,290*1/1.10 = 2,991 299
(c) Project C 4,380*1/1.1 = 3,982 398I don’t know where you found this question – I don’t think it is so brilliant, but anyway 🙂
If you have copied it correctly, then the wording is awful – the net present value is at time 0 which is one point in time. There is no such thing as a net present value for a year!
However, the the NPV of the project now is 5,700 it means that it is equivalent to 5,700 now.
If everything was delayed for one year, then the project would be equivalent to 5,700 in one years time. To get the present value (i.e. the equivalent amount now) we need to discount the 5,700 for one year. I assume the interest rate is 10%, so to get the present value we multiply by the discount factor at 10% for 1 year which is 1/1.10 to get a NPV of 5182.The difference in the NPV of 5700 and the NPV of 5182 if everything is delayed for 1 year is 518.
This was for Project A. It is the same logic for Projects B and C.
Thankyou so much Sir, yes it is really awful and I had copied it ……… 😉
It is clear now
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