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Dear John,
In the above question, construction commenced in January 20X2. That is period now (0).
I started my flows from period now but apparently this is wrong
How come the cash outflows starts from period 1?
Sorry about this, that this is not in one piece.
The part (a) (iii) on sensitivity, to this question is troubling me: Please help
Kind regards
It is assumed that the construction costs are paid at the end of each year (which is the most likely) and therefore the first payment is on 31 December X2, which is time 1.
With regard to the sensitivities, they are calculating (for each item separately) the % change that would result in an NPV of zero.
Dear John,
I continue to express my appreciation for yur time.Regarding the sensitivity bit, I am comfortable with working out the percentage change once I get the $ amount. I am struglling with the increases in the variables especially construction costs.
At first I presumed construction costs would increase by 300, 600 , and 100 for year 1, 2 3 respectively. Once I find the present values of these amounts I can then work out the percentage change.
The present value of these amounts is 843.4. The % sensitivity is 122.2/843.4 = 14.4%. The model answer is the same as this. But what is the amount in Dollars?
In like manner sensivitty for the operating surplus would be 122.2/1059.7 = 11.53%. But then again I am struggling to make sense of the $ cash flow involved.
same with decommissioning costs
I see the answers try to use the discount factors to find the $ amounts but like i said, i am struggling to understand the logic there.
Kind Regards
SamAlthough the question asked for % and $’s, the examiners own answer really only gives the %’s (anything else is just workings) and a $ amount doesn’t really mean much anyway – except insofar as stating the amount by which the NPV needs to fall.
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