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ACCOUNTING AND FINANCIAL ENGINEERING - EXAMPLE 34.24 : (a) The net present value of an engineering project is given by V. Let Q = summation of [ T / (1 + I) ^ N ] from N = A to N = B, where P = project cost, T = tax inflow, N = duration. If V = P + Q where P = -$1000, T = $275, I = 0.12 (means 12 % , capital cost of project per year), A = 1 year, B = 5 years, calculate the value of V. (b) The present value tax shields are W = $ (11.9725, 9.1486, 6.5579, 4.1811, 2.0005) in 5 beginning balances of an engineering project. Find the adjusted present value of the engineering project X, when X = V + (summation of the values of W).
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Answer Posted / kangchuentat
ACCOUNTING AND FINANCIAL ENGINEERING - ANSWER 34.24 : (a) Let ^ to be mathematical symbol for power. From N = A = 1 year to N = B = 5 years, Q = summation of [ T / (1 + I) ^ N ] = T { summation of [ (1 + I) ^ (-N) ] } = $275 { summation of [ (1.12) ^ (-N) ] } = $275 [ (1.12) ^ (-1) + (1.12) ^ (-2) + (1.12) ^ (-3) + (1.12) ^ (-4) + (1.12) ^ (-5) ] = $991.31. Then V = P + Q = -$1000 + $991.31 = -$8.6865. (b) X = V + (summation of the values of W) = -$8.6865 + $ (11.9725 + 9.1486 + 6.5579 + 4.1811 + 2.0005) = $25.1741. The answer is given by Kang Chuen Tat; PO Box 6263, Dandenong, Victoria VIC 3175, Australia; SMS +61405421706; chuentat@hotmail.com; http://kangchuentat.wordpress.com.
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