Question

CH2 DQ1

Options Menu: Forum When solving problems where a series of cash flows are shifted (the series does not begin at year 1), Would you still use the P/A factor to find the present value? Please provide your own example/scenario where you have, or could, experience a time when you would have to do this.

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Answer 1

Yes, I would still use the P/A factor to find the discounted
value at the beginning of the year in which the series of cash
flow starts and then discount out it to today's value by
multiplying it by P/F.
For example, consider a project with an initial investment of
$400,000 and cash inflows of $90,000 for nine years, the first
of which is from end of year 3, the discount rate being 9%.
Here, the P/A(9,9) can be used to get the discounted value of
cash inflows at EOY 2, which value can be dicounted using
P/F(9,2) to fing the PV at t0.
The calculations are shown below:
Discounted value of cash inflows at EOY 2 = 90000*P/A(9,9) = 90000*(1.09^9-1)/(0.09*1.09^9) =	$   5,39,572
PV of the above discounted value = 539572*P/F(9,2) = 539572/1.09^2 =	$   4,54,147
Less: Initial investment	$   4,00,000
NPV	$       54,147