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Dear Sir,
I made an attempt at this question note above only to get stuck shortly after. I was unable to identify or even calculate value of the future cashflows (Pa) from the scenario. However, in comparing my variables extracted to the solution I recognized I had all but (Pa). Having looked at the solution am even more confused as to how the examiner came up with (Pa).
Would be grateful if you can shed some light on this matter. I thank you
The question says that the expected NPV (in three years time because it would be with the option) will be zero and that the investment needed is $15M.
This means that the PV of the inflows must be $15M (so as to end up with an NPV of zero) in three years time.
To get the PV ‘now’ we need to discount for 3 years at 12%, which is why it has been multiplied by 0.712.Oh yesss! I understand now….thank you so much. And the funny thing I thought about it but never actually put it the calculator to validate it.
Much thanks!
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