Hi, I m currently studying about NVP Calculation. I m looking at this exam solution and I dont understand how the discount factor is calculate

Here it is:

If the discount rate to be used is 10% in real terms and the corporate tax rate is 28%

p.a. produce an NPV for the project.

Solution

Net cash flow -£904,000___£240,300___£243,815___£249,746___£639,324

Discount factors 1.000000___0.865801___0.749611___0.649014___0.561917

PV cash flows -£904,000___£208,052___£182,766___£162,088___£359,247

NPV £8,15

I dont understand how the Discount factors is calculated and where the 10% discount rate and 28% tax rate were used. Any help is appreciated. Thank you

NPV Calculation, not NVP. Sorry for the spelling mistake.

I can understand the discount rate is 10%, meaning 1/1+10%=0.909 for 1st year.but look at the number its 0.865, which means the corporation tax rate have something to do with it. And I cant figure out where or how.

and the inflation rate is 5% if it helps.

## NVP Discount Factor Calculation?

February 1st, 2014 admin

The discount factor used in calculating present value is referred to as PVIF, it is the present value interest factor of £1 at an interest rate i% for n periods

Since the first period in discounting of the value is 0 thus the PVIF = 0

Here is the formula

PVIF(i%,n) = (1+i%)^-n = 1/(1+i%)^n

PVIF(10%,0) = 1/(1+10%)^0 = 1/(1.10)^0 = 1/1 = 1

PVIF(10%,1) = 1/(1+10%)^1 = 1/(1.10)^1 = 1/1.10 = 0.909

PVIF(10%,2) = 1/(1+10%)^2 = 1/(1.10)^2 = 1/1.21 = 0.8264

PVIF(10%,3) = 1/(1+10%)^3 = 1/(1.10)^3 = 1.331 = 0.751

You can opt to use an online PVIF Calculator here at http://thinkanddone.com/en-us/online-pvif-calculator.html

Edit Hi Vinh

It seems like your calculations are using a discount rate of 15.50%

Here is how I found the rate

r=1/0.865801-1

r=1.1549998209750277488706989250417-1

r=0.1549998209750277488706989250417

r=0.155

r=15.50%

And now you can check the other factors for t=2

1/(1+15.5%)^2

1/(1.155)^2

1/1.334025

0.7496111392215288319184423080527

If the inflation rate was 5.5% then the discount rate would be 10%+5.5% = 15.5%

The tax rate has nothing to do with discounting, it is used for calculating after tax cash flows