# Unit 6 Long term decision making

Registered Posts: 1 New contributor ?
Hi hope someone can help,

I am stuck on present value tables (chapter 9 BPP book), I get the basic idea but you look down the chart for a figure 0.826 for example then you find out the answer required is 0.8264, where does the 4 come from, I must be missing something but can not see what.

• Registered, Moderator Posts: 2,034
Don't worry about the decimal places.
Your question will be very clear
go to http://www.aat.org.uk/students/content/item2457/ and have a look at past exam paper questions

For example June 08
Data

The company is negotiating with a potential new customer to supply them with a labelled plastic food container. The following estimates of capital expenditure, sales and costs have been produced. The contract is for three years, and at the end of that time – if it is not renewed - the capital equipment will be sold for £100,000.

......................................... Year 0 .................Year 1......................Year 2................. Year 3
............................................£000 ....................£000 .....................£000 .....................£000

Capital expenditure/disposal ..... (600) ........................................................................... 100
Other cash flows:
Sales income...................................................... 900..................... 1,350..................... 750
Operating costs .................................................. 710........................ 895..................... 560

The company’s cost of capital is 11%.

Present value (PV) factors for an 11% discount rate are:

.........................Year 0........... Year 1........... Year 2........... Year 3
PV factor........... 1.0000........... 0.9009........... 0.8116........... 0.7312

Calculate both the net present value (NPV) and the payback period for the proposed new contract.

(a) The net present value (NPV)

......................................... Year 0 .................Year 1......................Year 2................. Year 3
............................................£000 ....................£000 .....................£000 .....................£000

Capital expenditure/disposal ..... (600) ........................................................................... 100
Other cash flows:
Sales income......................................................
Operating costs

Net cash flows

PV factors

Discounted cash flows

Net present value
Sandy
[email protected]
www.sandyhood.com
• Registered, Moderator Posts: 2,034
There will be no need to look up the PV (or discount) values on tables.
Just as in this question, find the net cash flows, then multiply these values by the PV factors to find the discounted cash flow.
Sandy
[email protected]
www.sandyhood.com
• Registered Posts: 85 ? ? ?
for info

Yeah this confused the hell out of me its not a problem for the exam however, it annoyed me so much I had to work out how to get the 4 or more decimal places.

On a calculator enter 1/ 1.04 (where .04 is your cost of capital /interest percentage, so if it was 12% it would be 1/1.12) when you press = it will give you the number to multiply by to give your Present Value figure for the 1st period. So for 4% cost of capital it will tell you to multiply by 0.9615 for the second period just press = again and it will give you 0.9245 and so on, just keep pressing = for the number of periods ( usually years )