Student Forums CMA Part 2 Section E: Investment Decisions E.2. Capital Analysis Analysis Methods 54. Question ID: CMA 1295 4.12 (adapted) (Topic: Net Present Value Method)

54. Question ID: CMA 1295 4.12 (adapted) (Topic: Net Present Value Method)

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  • #219624
    Jijish Kollan Valappil
    Participant

    Dear Sir,

    Can you please explain why the amount is year1- 60000 and year 2- 40000 instead of 160000 and 140000

    Regards

    Jijish k v

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  • #219643
    Brian Hock
    HOCK international

    Hello, Jijish KV,

    This is the way that the math was done to calculate the PV. Instead of using each individual year as a separate cash flow, the answer does the math with a $100,000 annuity for all five years. But, since in Years 1 and 2 the amounts were more than $100,000, the ‘extra’ amount in Years 1 and 2 needs to be calculated and added to the present value of the $100,000 annuity that we can use since all of the years have at least $100,000 in them.

    You could have also calculated a PV of $160,000, $140,000, $100,000, $100,000 and $100,000 individually. That would give the same answer, but would require more calculations that doing it as a $100,000 annuity for all five years and then adding the PV of $60,000, and $40,000.

    Does this help?

    Brian

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