Q4 December 2012

Hi John,

A strange thing: I’ve solved numerous questions and I was sure that Terminal Value should be discounted at discounted factor of the previous year, but I found the following answer for Q4:

Net present value of PDur05 =
($2,500,000) + ($1,200,000 x 1·11^–1) + ($1,400,000 x 1·11^–2) + $970,000 x 7·191 x 1·11^–3
= ($2,500,000) + ($1,081,000) + ($1,136,000) + $5,100,000
= $383,000

Please clarify why the terminal value in this case is discounted at (1.11^-3 – not 1.11^-2).

Why? Because it’s not based on indexation based on the previous year?

Thank you in advance.