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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).