ICAEW BIP · Chapter 13 · Question 7 of 9
A project will generate £10,000 a year at the end of years 3 to 7 inclusive. The cost of capital is 10%. Annuity factors at 10% are: 2 years 1.736, 3 years 2.487, 5 years 3.791, 7 years 4.868. What is the present value of these cash flows?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) £31,320
Explanation
The cash flows are a 5-year annuity covering years 3 to 7. Annuity factor = 7-year factor - 2-year factor = 4.868 - 1.736 = 3.132. PV = £10,000 x 3.132 = £31,320. Subtracting the 3-year factor would wrongly exclude year 3.
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