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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