Hi, can someone please explain how to calculate the column K <Adjustment for cont income ='d'/delta> in CM1B 2019 April Q2? I was thinking to calculate it by (1-v^1/12)/force of interest, but it doesn't seem right. which chapter mentioned the formula? Thanks
When I did this question, I adjusted for the continuous nature of the cashflows using an abar:<1> factor calculated at the monthly effective rate of interest, i(12)/12. This actually turns out to be the same thing as they've done in the solution spreadsheet. We have i(12)/12 = 1.12^(1/12)-1 = 0.9489%. Using this, we can find the PV of a continuous monthly cashflow, X_m, in any month of the project, m, using: PV = X_m * v^(m-1) * abar:<1> @ 0.9489% Now abar:<1> = (1-v)/delta. Also, 1-v = d, so abar:<1> = d/delta, which is what the examiner has used. If your (1-v^(1/12))/delta factor was calculated using the annual effective interest rate of 12%, then you're using the monthly effective interest rate in the numerator (because v is to the power of 1/12) and the annual effective rate in the denominator. This gives you the PV of 1/12 of £1 (about £0.08) payable continuously over a month, so you'll get a much smaller value than the abar:<1> factor calculated using just the monthly effective rate.
