[Anonymous]

I’m looking at a question and to save the unnecessary details – it asks to solve for the amount of cash flows in “year 1” to get an IRR of 7%. Becker says do not discount year 1 cashflows at all; i say you do discount them.

Here are the details. You are given the initial capital outlay, year 2 and 3 cashflows, as well as the discount factors for years 1, 2, and 3.

Year 1’s discount factor .9346 (not 1) as provided by Becker.

In their calculations, however, they discount year 3 CFs by year 3’s factor, year 2 CFs by year 2’s factor, and then year 1’s CFs by 1.00 (and not the discount factor of .9346).

I think it’s an error on their part. The initial capital outlay is undiscounted starting at T = 0, but year 1’s cashflow is discounted (by 1.07% of year 2’s discount factor)

Can I get a sanity check?

Becker has been wrong before, but this is a quick fix. Don’t you always discount year 1 CF’s?

[Rhunter]

Not sure if this will help, but wouldn't it depend on when in year 1 the CF occurs? Beginning of year would not be discounted, end or year would be discounted. Just throwing that out there, I'm not familiar with Becker at all, and it's been awhile since I've had any practice with PV with the exception of bond calculations. Sounds like you're studying for BEC, correct?

[Anonymous]

Yea that's correct – BEC. You are right about timing. They don't say whether the cash comes evenly through the year, at the beginning, or end.
Using logical consistency, you'd want to use the year 2 factor x 1.07, getting the factor for year 1. That's what I've done, and becker hasn't.

To be honest, despite the fact becker has got me through FAR and REG, they have very bad quality control.
DeVry owns them.

[aaronmo]

cjsoccer…

I agree…but it doesn't seem to be just Becker; it seems to be an industry issue. I haven't used Wiley exam prep, but I had wiley class room products in school, and they had outrageous errors, mistakes, and poor writing throughout their course work. Pearson had a few…not anywhere near as bad as wiley…but they existed. In a typical exam using Wiley, I would typically challenge 3-4 questions (out of around 30) and win on almost every challenge. Whatever grad students they get to write these questions aren't being properly edited.

[aaronmo]

Also – the fact that you're spotting them and thinking about them is a very good sign. I generally found the actual exam questions to be more clearly written…though it's impossible to judge completely without seeing their answers and logic.

I drove myself nuts getting pissed with Becker errors, but after a few sections I just considered it part of the deal.

[Author]

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