Present Value Question - Please Help
A project is being advertised to solicit bidders. The buyer has asked for two types of price first, if payment is made in total upon completion of the project; second, if payment is made 50 percent at the midpoint of completion and 50 percent upon total completion. This is a two-year project that is being priced at $10,000,000 when the cost of money is not included. Assume money is borrowed in two equal increments-at the start of year 1 and year 2. If the interest rate over the two years is eight percent, the total bid under each option (i.e., payment at the end; payment at midpoint) is ________.
A. $11,844,000; $11,412,000
B. $10,400,000; $10,040,000
C. $10,800,000; $10,400,000
D. $11,232,000; $10,832,000
E. $12,484,000; $11,244,000
Ans is ( D ) .....Please explain, Why ?
saketbansal
Sun, 05/04/2014 - 13:10
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Point no 1 is simple since we
Point no 1 is simple since we need to caculate the total project cost with taking care of time value of money
Since 10,000 is the cost and we expect two equal investement
5000 Year 1 + 5000 Year 2
For year 1 borowing i need to pay interest for two years , for year 2 borrowing i need to pay interest for one year. so it comes to
5000*(1.08)*(1.08) + 5000(1.08)
= 11,232
Point no 2, i take is like we invest 5000 in the start of the year 1 and we get 50% payment at the end, so i can charge all money,
I take money from bank in the begining 5000 , so it becomes at the end of year 5000*1.08 , so i ask for 5400 at year 1 ending , and in the same way i do for year 2. In my view second option should cost
10,800 (5400+5400)
I do not expect such questions coming in PMP exam....
you may like to refer to our vidoe on this topic
https://www.youtube.com/watch?v=yIMMy8hh0WQ
sunku65
Sun, 05/04/2014 - 14:36
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Payment at the End
Payment at the End Calculation:
Start of 1 year 5,000,000 (PV) bought need to pay only after completing the 2 years project.
So, need to calculate 2 years Future Vlue. Therefore, end of the 2 years now FV = 5,000,000 (1+0.08)^2
FV = 5,000,000 * 1.1664
FV = 5,832,000
Start of 2 year 5,000,000 (PV) bought need to pay only after completing the 2 years project.
So, need to calculate 1 year Future Vlue. Therefore, end of the 1 year now FV = 5,000,000 (1+0.08)^1
FV = 5,000,000 * 1.08
FV = 5,400,000
TOTAL FV=5,832,000+5,400,000 = 11,232,000
Payment at Mid-Point Calculation:
Note: Flow of Cash here First year starting 5,000,000 bought. Second year starting(mid point) bought 5,000,000 and paid 5,000,000 no need to calculate Future Value. We need to calculate only First years money for 2 years FV.
Start of 1 year 5,000,000 (PV) bought and need to calculate 2 years FV.
So, need to calculate 2 years Future Vlue. Therefore, end of the 2 years now FV = 5,000,000 (1+0.08)^2
FV = 5,000,000 * 1.1664
FV = 5,832,000
Start of 2 year 5,000,000 (PV) bought and paid immediately 5,000,0000.
No need calculations just 5,000,000
TOTAL FV=5,832,000+5,000,000 = 10,832,000
Based on given answer i tried to solve answer, finally the above method got tallied answer. If, does't mention answer D.
I would have the victim of the wrong selection guy. Please someone justify nice way.
sunku65
Sun, 05/04/2014 - 14:54
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Hi saket,I got cleared about
Hi saket,
I got cleared about my doubt based on your Point No. 2.
Assume here your point No.2 refer like this it will sovle our both problems.
Point no 2 : Bought Year 2nd starting 5000 paid 5000 no need calculation FV for this cash flow. Just take only 5000.
Cash Flow : Starting First year 5000 + Second Year starting 5000 - Second Year Mid point paid 5000
(Need to take only 5000 PV in second year Mid point, no calculations. Why means i don't have answer)
This question totally mess-up our time and mind in Exam.
https://sites.google.com/site/pgmpguide/pmp-1-20 to 461 - 480 also has some very very very Pmbok versions also.
I read this quetions defenetly thiks i will fail. but good for practice.
saketbansal
Mon, 05/05/2014 - 10:02
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I agree with sunku65 , good
I agree with sunku65 , good to practice but do not take it too seriously .... you do not get such questions in exam ... as far as i am aware of..... and i talk to 5-10 PMP certified people in a month.
faisalg78
Sun, 05/04/2014 - 19:02
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Appreciate you all for
Appreciate you all for clarification/comments.