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Exam Year 2006 May Q9

S

Srijana Raghunath

Member
In question, it is given that the discount rate is 15%, but in solution calculations are done taking i = 15%. Shouldn't it be i = 13%?

Question is as follows:

Q9) A company ABC is considering investing in a project. The cost of project will be Rs.10 crore at the beginning of the first year. There are further costs at the beginning of second to fifteenth year. The cost at the beginning of second year will be Rs.1.5 crore and will increase every year thereafter at a rate of 5%.
The income will be Rs.3.5 crore at the end of each of first 5 years, increasing by Rs.50 lakh at the end of each of sixth to fifteenth year.

The company ABC sets a discount rate of 15% pa to evaluate this project.

(i) Explain what is meant by discounted payback period of a project (2)
(ii) Calculate net present value of the project (7)
(iii) Calculate the discounted pay back period for the project
 
why do you think it should be 13%? where does this come from?
 
d = 15%
d = i / (i+1)
hence, i = 13%

Am i incorrect?
 
Two things are wrong here. The first is that when we use a risk discount rate in projects it is not actually a discount rate. It is an interest rate. The second issue is that if we were to convert using the formula stated then you would get i = 17.65%.
 
John Lee said:
Two things are wrong here. The first is that when we use a risk discount rate in projects it is not actually a discount rate. It is an interest rate. The second issue is that if we were to convert using the formula stated then you would get i = 17.65%.
Click to expand...


Thank you. I had not considered it to be risk discount rate and indeed, my calculation was also incorrect.
 
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