CM1 B- Sample Paper Doubt

[Parul Aggarwal]

Hi
I have a doubt regarding the approach followed for calculating discounted values of cashflows in Q1(i), where the answer booklet shows the discounted value at time n as (cashflow)/(1+i)^n which give the present value at time 0. As an example, the PV for a cashflow corresponding to time 2 is calculated as CF2/(1+i)^2 which give the PV at time 0, but this PV is shown in the time 2 row. Therefore, it is calculating the PV at time 0 FOR a cashflow happening at time 2 and showing it in the row of time 2.
Shouldn't the PV in the row of time 2 in the excel should be the discounted value of all the cashflows from time 2 till end, which gives the PV at time 2?

 

[Lucy England]

There's almost always more than one way to answer questions, so the model answers just show one possible approach.

The approach taken in the solution spreadsheet calculates the PV at time 0 for each individual month's cashflow and adds these up at the end to get the total PV at time 0 of all the costs and income. This approach is quick and easy to set up, so I assume that's why they've gone for it. The important part is the answer, i.e. the total PV of costs at time 0 (£101,668,126).

You could use a cumulative approach and take the total PV at time 0 of all cashflows up to each month you're looking at. As long as you get the right answer and aren't making later parts of the question more difficult, then do what works for you!

 

[Beansdale]

I thought something like this - they say the building starts immediately and costs are incurred at the start of the month, then they discount the first cost from t=1....