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In DIGUNER’s question (ques 36, Kaplan exam kit sep2021-june2022)
In part (a) of this ques
For finding Pa( current price)
The immediate NPV is given $4m and option to purchase land at an agreed price is give $24m within next 2 years .
According to me to find Pa , we must discount this $24m to get its value at T0 and then add 4 million to the present value of $24m to get Pa.
But in book solution they have add (4m+24m) then they have discounted the full amount .
Thing I can’t understand is why they have discounted this $4m again . As it is already on its present value (T0).
I do not have the Kaplan Kit (only the BPP Kit), however I do have the examiners own answer 🙂
The wording of the question was very poor (and this was the previous examiner – not the current examiner).
The examiner has assumed that by ‘an expected NPV of $4M) it meant that the NPV when the development starts will be $4M and as therefore taken Pa as being $28M (the PV of the future flows once the development starts).
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