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Question 1.9 In Corse notes

D

DevonMatthews

Member
Question states if a project costs 1.5mil pounds and is expected to bring in a net cashflow of 500,000 pound for each of the next 4 yrars. If the discount rate is 10%, is the project worth doing?

Solution attemps to compute NPV of the project as follows

-1,500 + 500/(1.1) + 500/(1.1^2) + ... + 500/(1.1^4)

= +84.95

But isnt this calculated using an interest rate of 10% when the question says the discount rate is 10%, meaning i = (1/0.9) - 1 = 11.11%

So the NPV of the project should actually be computed as -1,500 + 500a_4 @11.11% = 47,550 pound.

It's still positive but this isn't listed as a mistake on the corrections page and no one has brought it up in this forum so i'm starting to wonder if im going crazy!
 
I believe discount rate is another term for interest rate. Discount rate is not the same as rate of discount.

d = Rate of Discount
 
I see. That seems rather technical, i've never come across that term before. I Can't understand why the question would specify a discount rate, why can't they just say Interest rate to avoid any confusion. Thank you for your reply.
 
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