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Hello John.
in my revision kit answers, sometimes instead of referring to the NPV tables to find a multiple to derive the NPV, they have just divided the amount by i.e. (1.x)^n (where ‘x’ is the cost of capital percentage as a decimal and ‘n’ is the number of years).
why and when is this second method used instead of the NPV tables?
Thank you.
You presumably know (from Paper MA (was F2) or whatever exempted you from the exam) that the figures in the tables you are provided with are all calculated using the formula.
So it doesn’t matter whether you use the formula or whether you use the tables. Usually it is faster to use the tables, but that is your choice.
The only times you cannot use the tables are obviously if it is a perpetuity, or (but very unlikely) if it is an interest rate that is not in the tables (for example 12.4%). However if the interest rate were 12.4% then you would use the tables on the nearest whole % (i.e. 12%) unless the question specifically wanted you to do it precisely (which, again, is unlikely).I do actually explain all of this in my free lectures!
ok thanks John.
(just to note- in my revision kit (Kaplan) they are sometimes using both methods for two different items within the same question).
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