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The question asked to quote minimum contract price.
I got till 125,696
But I didn’t quite understand why further discounting .
Wasn’t DCF already incorporated whilst reaching at 125,696.
Please do not post links like this, it is illegal for us because of copyright laws.
For the minimum contract price, the NPV must be zero. Therefore the PV of the receipt in 2 years time must be 125,696. That to be the PV of the contract price, the amount itself must be 125,696 divided by the two year discount factor as explained in the answer.
Sorry sir I won’t attach any links ..
However why does the amount itself be discounted..
Wasn’t 125696 reached as a result of discounting.?
Yes it was reached as a result of discounting – it is the PV of other flows.
For the NPV to be zero, the PV of the receipt must also be equal to 125,696 (not the receipt itself, but the PV of the receipt).