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September 2005 Q11(ii) - Help!

P

Paapi

Member
Hi,

Im having trouble understanding the solution in Q11 part (ii). I get the first part of the solution which is finding the PV for the outflows, but I dont understand how they've calculaated the PV for the inflows. Could someone please explain the working for the PV of inflows? Why cant you just calculate the PV for each cashflow and discount to 0? For e.g a(dash)_3+ 1.9 a(dash)_6*v^3 + 2.5 a(dash)_6*v^6+ 8v^15

Thanks in advance!
 
Hi

I couldnt work this out for a while either. You can do this, but the income starts after the branch opens (which is at time 3).

So you would have

a(dash)3*(v^3) + 1.9a(dash)3*(v^6) + 2.5a(dash)6*(v^9) + 8(v^15)

Hope this helps :)
 
Thank you so much! I didnt realise that the payments started in 3 years.
Makes more sense now!

Thanks!
 
just another point to help with this:

a(dash)_6-a(dash)_3 = [(1 - v^6) - (1-v^3) ]/1n(1+i)

= (v^3 - v^6)/1n(1+i)

= v^3 (1-v^3) /1n(1+i)

=v^3 a(dash)_3

and the other expressions found in the solutions come out similarly.

I don't really know why they did it that way and not the more obvious way tho...
 
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