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Sammar says

$2484 is the amount we put into the bank or whatever, 4000 is the Total we would get in 8 years and the interest we get is 1516,is this right??

Sammar says

2484 ÷ 8 = 310.5

1516 ÷ 8 = 189.5

So the total amount we get every year is 500

John Moffat says

$2484 is the equivalent amount now.

Certainly if that were the case then the total interest would be 1516, but it would not be 189.5 a year.

If the first year it would earn interest of 12% x 2484, bringing the total to 2782.08

Then we take $500 out, so in the second year it earns interest of 12% x (2782.08 – 500), which brings the total to 2555.93.

Then we take 500 out, and so on.

The only reason your two figures add up to 500 is because in total you have dividend 4000 by 8.

Carol says

Where can I find the lecture on Perpetuities?

John Moffat says

Here:

http://opentuition.com/acca/f2/acca-f2-revision-part-8b-discounting-compounding-interest-investment-appraisal/

Carol says

Thank you!

Emily says

sir how did you get the 4,968

John Moffat says

I used the annuity tables that are printed in the lecture notes (and provided in the exam).

If you look at the 12% column and the 8 year row, then you will find the annuity factor of 4.968

Julian says

Hi John

Thank you for posting these lectures. I got scribbling whilst you and Inusa were chatting about sneaking a look at the answers in this lecture…

For the question… an annuity of £1k pa. is received for 9 years with the first receipt in 4 years time (at 8%) – I used the tables to calculate a 9 year anuity (cost £6,247), and then used discount factoring to work out what to pay in at 8% to get that amount in 3 years, and got the answer £4,960, which was only £1 away from your answer. I though that this might be an acceptable alternative method, but then in your second example of that type of question, where £5k is received for 12 years with the first receipt in 3 years time (also at 8%), I got a 12 year anuity costing £37,680, requiring a PV of £32,292 (i.e 2 years discount factoring at 8%), which is £7 out from your results. I’m happy to go with your method in the exams, but don’t see why mine shouldn’t work also? Can you comment – is the discrepancy due maybe to the discount and annuity tables being presented to 3dp, or is it something else? (I realise I could work it out longhand to check… perhaps I will do in due course, but the exams are in 6 weeks time and I’ve a lot of material to cover before December!)

Many thanks

Julian

John Moffat says

You are correct in that the difference is due to the tables being only to 3 decimal places – it is simply a rounding difference.

In the exam you can use either method – whichever you are most happy with (you do not lose marks because of roundings due to the tables – to avoid this, questions will ask for the answer to the nearest $10 or $100).