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October 7, 2014 at 12:58 am
Hello Mr Moffat
Thanks for the lecture.
Please I’d like to know the difference between discounting and annuities; cos I’m actually beginning to get confused.
John Moffat says
October 7, 2014 at 8:14 am
Discounting is calculating the equivalent amount ‘now’ by removing the interest.
An annuity is simply an equal cash flow each year. When we discount an annuity we can save time by multiplying by the total of the discount factor (the annuity discount factor) instead of having to discount each cash flow separately using the ordinary discount factors.
August 22, 2014 at 3:10 pm
Question 4 in the test questions asks for the present value of $2000 per annum first receivable in 3 YEARS,but the solutions at the end of the notes calculates the first receipt after 2 YEARS.
Please could you shed more light on this and give clarity as to why they are different using the different number of years gives different answers. Or am I missing something or got something wrong somewhere? Please help.
Raj Singh says
October 15, 2014 at 11:12 pm
Its just a typo. The first line of the solution says 2 years but it should say “the first receipt is in 3 years and last receipt is in 10 years”. However the rest of the working is correct.
July 21, 2014 at 6:47 pm
Hey John, in annuity, i just wanted to knew if there was an easier way of calculating the
“total Annuity discount factor” i kind of calculate each and every year one by one and then total them all, it is really lengthy and exhausting. any idea? and thanks the lectures are just awesome!
July 21, 2014 at 7:50 pm
You are given the annuity factors table in the exam (they are printed at the beginning of our course notes, along with the normal present value tables)
Max Huelber says
July 2, 2014 at 6:10 pm
i’d like to thank you for this lecture .it is very helpfull ..
ive been trought some of the videos but i still dint get the 0.893 in this video above or on the payback period video the 0.909 figure.. could you kindly explain that to as im getting stucked on that.. thks MAX
July 2, 2014 at 6:13 pm
Have you looked at the answers to the examples at the end of the Course Notes?
July 3, 2014 at 6:49 pm
nope…where do i find it??? im new to this ….thks
July 3, 2014 at 8:46 pm
If you look just above the lecture, on the right, you will see a link to the download the Course Notes.
As it says, you need these to be able to follow the lectures.
At he back of the Course Notes you will find answers to all of the examples.
July 13, 2015 at 6:48 pm
hello sir, I looked at the answers at the back of the course notes and I still don’t understand how u got 0,893…..mind explaining it to me
July 14, 2015 at 9:18 am
If you look at the discount tables, then the 1 year factor at 12% is 0.893.
June 5, 2014 at 12:26 am
Quick question about perpetuities. I know how to calculate a perpetuity that starts now, but in a practice exam it said that payments would begin in 4 years time. Do I need to discount for years 1-3 and if so, how would I do that?
Thanks for your help.
June 5, 2014 at 7:04 am
There two ways that both give the same answer.
Either use 1/r for the perpetuity, and then discount for a further three years using the normal discount factor for three years.
Use 1/r for the perpetuity, and then subtract the three year annuity discount factor ( so as to be left with 4 to infinity)
Both will give the same answer. (Except for rounding difference)
February 25, 2014 at 6:30 pm
Will annuities formula be given in exam?
February 25, 2014 at 6:31 pm
What you get in the exam is the formula sheet and the present value tables. You will see that at the top of the present value tables there are the formulae for the discount factors (both normal discount factors and annuity factors).
You get these sheets in the exam.
February 13, 2014 at 8:53 am
Thank you for your brilliant lectures. I seem to be having trouble understanding example 8. Am i wrong in thinking that the question is asking for this -> “What amount of money should be invested TODAY so that in 4 year’s time from TODAY, you can start to withdraw $1000 each year for 9 consecutive years”?
Using the annuity table/formula, in order to receive $1000 for 9 years at a discount rate 8%, you would need to invest $1000 x 6.247 = $6247. I assume when the question says “4 years time”, it means that TODAY’s money would be invested for 4 complete years, making the present value of the $6247 (at 8% d/r) = $6247 x 0.735 = $4591.60
What am i missing? Or have i cocked up completely :S
February 13, 2014 at 9:05 am
What you have written is correct, except for one thing.
If the flows had been from time 1 to time 9, then multiplying by the 9 year annuity factor would give a present value (i.e. an amount at time 0).
Here, the flows are from time 4 to time 12 – everything is 3 years later, and so multiplying by the annuity factor gives an amount three years later i.e. at time 3.
So to get a present value we need to discount for 3 years (not 4 years).
$6247 x 0.794 (three year DF at 8%) = $4960 (which is the correct answer).
(There are two approaches you can use to get the same answer – the other approach is shown in the answer at the back of the course notes)
February 13, 2014 at 9:28 am
Fantastic thank you for the explanation That makes more sense.
abhinandh dileep says
December 6, 2013 at 8:33 pm
sir… can you please explain annuity with a an example ? i understood how to calculate it… but i am not able to understand why do we calculate it for?
December 6, 2013 at 11:05 pm
It is explained with examples in all the lectures.
All am annuity is is an equal amount each year. You could discount each year separately, but because it is an equal amount each year it is quicker to use the total of the discount factors for each year, which is all the annuity factors are – the total of the discount factors for each year separately.
December 7, 2013 at 11:45 am
thanks a lot…
November 27, 2013 at 6:44 pm
I would like to know i for CBE where i am ask to select three answers for the same question and if two is right and one wrong are if i choose two and leave one will i get 1/2 mark for the question.
November 27, 2013 at 10:12 pm
With CBE you get full marks if the whole answer is correct, and no marks if the whole answer is not correct.
October 9, 2013 at 5:14 am
Is perpetuity examinable? There is no lecture on that topic but it is in the notes
My calculator can not calculate the formula (pricipal xx=====………) why?
October 9, 2013 at 5:40 am
Yes – perpetuities are examinable. The discount factor is 1/r where r is the rate of interest. (I do not know which formula your calculator is having problems with )
October 8, 2013 at 2:47 pm
i want to know do they give annuities value like 10% of 1 year have 0.990 then 2nd of etc ,
i should i have to learn or do they give this all
October 8, 2013 at 2:59 pm
The present value tables and the annuity tables are both given in the exam.
June 9, 2013 at 9:07 am
Will these formulas (annuity and present value) be given in exam papers?
June 9, 2013 at 10:01 am
It depends what you mean by the formulae.
The formulae for the discount factors are given at the top of the discount tables, which you are give in the exam.
June 9, 2013 at 10:51 am
okey, may they check us if we know formula for present value of annuity, may they give e.g. 5.3% or sth?
June 9, 2013 at 10:57 am
They can ask you to calculate a discount fact at 5.3% using the formula. However you are not expected to learn the formula – it is given to you at the top of the discount tables (there is copy of them in our course notes).
June 9, 2013 at 11:21 am
thank you very much
May 17, 2013 at 3:47 am
for the last question was lost because i dont have the question nor table……but over all its clearer
May 20, 2013 at 10:09 pm
Must try googling the tables
May 21, 2013 at 6:02 am
The question and the tables are in our course notes!
February 6, 2013 at 7:26 am
An Investor Is to recieve annuity of $19260 for six year commencing at end of year 1 it has a present value of $86400.
what is a rate of intrest??
Answer with The Manual Calculation OF Rate OF intrest Without Using Table
April 4, 2013 at 12:27 pm
To answer this without tables would be wasting time – it cannot be asked in Paper F2 (you cannot be asked for manual calculations of this sort).
October 8, 2013 at 2:50 pm
do they give annuity table in the exam or not
January 16, 2013 at 12:45 pm
hi guys pliz hlp me on this que. dont know how to solve it.
Mr Mannaton has recently won a competition where he has the choice between receiving $5000 now or an annual amount forever starting now. (ie a level perpertuity starting immediately). the interest rate is 8% per annum. what would be the value of perpetuity to the nearest $?
April 3, 2013 at 8:48 pm
the perpertual annuity formula that i know is P = R over i where P is Present value and the R is payments and i is the interest. Now i think we can play with mathematics here and say since we know the present value we can multiply it by the interest to get the R which is the payments value $ 5000 x 0.08 = $400
so $400 will be the monthly payments to be recieved indefinitely
April 4, 2013 at 12:25 pm
The question says that the perpetuity starts immediately – i.e. the first receipt is at time 0 (or now).
So…..if x is the amount per annum, then (5000 – x ).0.08 = x
400 – 0.08x = x
400 = 1.08x
So x = 400 / 1.08 = 370.38 p.a.
December 11, 2012 at 5:51 pm
from my calculations it is 15 yrs time and not 14 please double check your arithmetic and let me know if i am right or wrong
December 12, 2012 at 6:55 pm
@accakeisha, I am not sure which example you are referring to – there are many in this lecture.
If you mean the one that says $5,000 is first received in 3 years time, and that there are 12 receipts in total, then my arithmetic is correct!
The first receipt is in 3 year, the second in 4 years, the third in 5 years….if you carry on the the 12th receipt is in 14 years time.
November 5, 2012 at 10:07 pm
Why its the the OT F2 Notes beck answer for question 8 is different of what sir have explained? Its printing mistakes right?
October 23, 2012 at 2:17 pm
why is it 14 years less 2. thanks Teacher you are the best
October 23, 2012 at 7:47 pm
@claudette, it is because we want the total factor for years 3 to 14 inclusive.
The 14 year factor gives the total for years 1 to 14, so we need to take off the total for years 1 and 2 (the 2 year annuity factor) to be left with the total for 3 to 14.
October 15, 2012 at 1:20 pm
is the Fisher’s Price Index equally important as the above???
October 23, 2012 at 7:39 pm
@nhs14, well not really, and it has nothing to do with annuities
July 15, 2012 at 5:05 pm
it’s very sad to see students remain passive in most lectures.
November 24, 2012 at 8:01 am
@mellen, It really is frustrating! :/
August 22, 2014 at 3:32 pm
There is a tiny typing error in the first line of the answer (thank you for noticing it – I will have it corrected immediately).
The first line should read “The first receipt is in 3 years time and the last receipt is in 10 years time”.
Everything else in the answer is correct – we take the annuity d.f. for 10 years, and subtract the annuity d.f. for 2 years, so as to be left with the total d.f. for years 3 to 10.
August 22, 2014 at 3:56 pm
Hello Mr John Moffat,
Ok then, no problem.
Thank you for your response
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