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Dear Sir,
question 8 of section A of mock exam 1 on BPP revision book
npv value of cost of new work provided over five years $53,074
cost of capital 10%
payment received at the end of the project
tax rate 30%
minimum tender price to include on their project is (according to the book) $122,109
that is 53,074*(1.1)to power of 5= 85,476 divided by 1-0.3 because that would be the price before tax is paid on it by the companycould you please explain why shall I multiply npv time cost of capital to the power of 5?
the discount rate already accounts for the time value of the money so I would expect a minimum pprice similar to the npv insteadthank you
You have addressed this to ‘Dear Sir’ which I assume is me.
If you want me to answer questions, then you should ask in the Ask the Tutor Forum – this forum is for students to help each other.Since the price is to be paid at the end of the project – which is in 5 years time – we need the PV of the payments to be equal to the PV of the costs.
If the cost quoted for the project is X, then the PV of it is X divided by 1.1^5.
So since we know what PV we need, then X must be the PV of the costs multiplied by 1.1^5
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