N
Noely
Member
Hi All,
I have been working through the 27th April 2010 paper recently, and had some questions which I would like to get some clarification on.
Question 9:
A company is undertaking a new project. The project requires an investment of 5 million at outset, and another 3 million 3 months later.
It is expected that the investment will provide income for the next 15 years, starting from the begining of the third year. Net income is 1.7 million paid continously over the year and the effective rate of interest is 10% p.a.
ii) Calculate the discounted payback period.
My Analysis:
So we know that the DPP is essentially the minimum time at which the investment, moves out of the red. Therefore we are looking to equate the PV of inflow with the PV of outgo.
Therefore we end up with something along the lines of:
5+3v^(3/12) = 1.7a(continous)v^2
Now solving this for the value of n (or t whichever way you prefer to look at it), we get the answer of 8.0999.
This would indicate that the DPP for the investment would be 8 years from the point of onset. However the DPP is said to be at t+2, which would then make this 10 years.
Now the question is: Is the DPP assumed to be at t+2 primarily because the income of 1.7 million continous p.a. does not commence until the end of the second year? i.e. the same reason that we are discounting the 1.7 million by n=2.
Ultimately the definition of the DPP does not seem to distinguish between the time when income is recieved, well it doesn't appear to be a factor in calculating the DPP. So I just wanted to clarify what the specific reason is for the t+2 consideration.
I have been working through the 27th April 2010 paper recently, and had some questions which I would like to get some clarification on.
Question 9:
A company is undertaking a new project. The project requires an investment of 5 million at outset, and another 3 million 3 months later.
It is expected that the investment will provide income for the next 15 years, starting from the begining of the third year. Net income is 1.7 million paid continously over the year and the effective rate of interest is 10% p.a.
ii) Calculate the discounted payback period.
My Analysis:
So we know that the DPP is essentially the minimum time at which the investment, moves out of the red. Therefore we are looking to equate the PV of inflow with the PV of outgo.
Therefore we end up with something along the lines of:
5+3v^(3/12) = 1.7a(continous)v^2
Now solving this for the value of n (or t whichever way you prefer to look at it), we get the answer of 8.0999.
This would indicate that the DPP for the investment would be 8 years from the point of onset. However the DPP is said to be at t+2, which would then make this 10 years.
Now the question is: Is the DPP assumed to be at t+2 primarily because the income of 1.7 million continous p.a. does not commence until the end of the second year? i.e. the same reason that we are discounting the 1.7 million by n=2.
Ultimately the definition of the DPP does not seem to distinguish between the time when income is recieved, well it doesn't appear to be a factor in calculating the DPP. So I just wanted to clarify what the specific reason is for the t+2 consideration.
