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Investment Appraisal Discounted Cash Flow – Annuities and Perpetuities
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I think the interpretion on Qn 5 pg 40 is wrong:Look at how i think it should be counted and end of the tenth year would year 14 and not 13
Receivable in 4 years time:
year 1 2 3 4 5 6 7 8 9 10 11 12 13 14
There after for total 10 years 1 2 3 4 5 6 7 8 9 10
Am i correct to think this way????
Thanks
Ac
Question says the “first recieable in 4 years”.ie it assumes the first reciept is by the end of fourth year,and follows until 10th year completes.
I know that the wording may confuse, but it is likely wording in the exam.
The first receipt is in 4 years time – time 4 – and there are 10 receipts in total (not 10 receipts in addition).
So for 10 receipts in total, the receipts are at times 4 5 6 7 8 9 10 11 12 and 13.
hi, john. trying to calculate the answer to Q7 on page 41 by using the other method, and the answer was different. the way i’ve done it was: if there will be receiveables from year 5 to infinity, then on year 5 the discount factor will be:
1/0.05 x 0.784= 15.68 . i agree the way that have been shown in the vid is less confusing and if i was right then the figures should be the same. can you help, please? thank you!
The formula 1/r is the discount factor for perpetuities.
So if you assume receivables happen from time=0 to time=infinity, the discount factor for this example is 20, and the present value of 18,000 annually in perpetuity is 18,000×20 = 360,000. (This means if you put 360,000 in the bank now you will get 18,000 every year)
The only thing you are left with now, is to remove years 1-4.
You can do this by removing each year individually (by multiplying 18,000 by the 1,2,3 and 4 year discount rate in the present value table) or by removing years 1-4 in one lump sum by multiplying 18,000 by the discount rate in the annuity table for year 4.
The Annuity table is simply the present value table, summed to include all preceding years.
In this example…
Year 1 discount factor = 0.952
Year 2 = 0.907
Year 3 = 0.864
Year 4 = 0.823
Because net cash flow is the same each year (18,000), instead of multiplying 18,000×0.952, and 18,000×0.907, and 18,000×0.864 and 18,000×0.823, we can instead say that it is the same as 18,000x(0.952+0.907+0.864+0.823) = 18,000 x 3.546.
So the answer would be (18,000 x 1/0.05) – (18,000 x 3.546).
y10829
I may be mistaken, but lukedavidizard seems to be just repeating what is in the video lecture!
The approach that you are trying to take is fine, but you have made one error.
The discount factor for a perpetuity is certainly 1/r, and if the perpetuity started in 1 years time then this would give the present value (the amount now).
However, the perpetuity starts in 5 years time, which is 4 years later. So multiplying by 1/r would give a value 4 years later – i.e. at time 4. To get back to the present value you would then need to multiply by the ordinary discount factor for 4 years (not 5 years as you have written).
If you do this then you will get the same answer. (In fact it will probably be a little different, but this will be simply due to rounding and does not matter).
thank you, john. i understand now!
thanks! well explained and made easy to understand.
Hi please tell me how to get the percentage figure 0.870, 0.756…., cos my calculator give me the different figure. Please help! Thank you.
these figures are in the present value table so no need to calculate
hasanali95 is correct – since you are given tables you do not need to calculate.
However, I would try and sort out your calculator – you will need to do other things with it even though you will not need to calculate the discount factors (which are not percentages by the way!)
Excellent
great
John you are amazing in helping us.
Using better gramma in the lecture notes would make things a lot clearer. Ex5 p.g.40 can be interpretated as 10 more years after the 4th year.
@danielglover, No – the grammar is perfectly correct.
It specifically says “for a total of 10 years”
That does not mean 10 extra years, it means 10 years in total.
please tell me how to download..
thank you
This guy is amazing. very clearly explained.
Thanks very much to make these so simple to understand
that’s great! I love it.
Thank you for these videos open tuition, the tutors are excellent, ive learnt more from these videos in the last few days than what i’ve learnt at school in the last year!
the whole idea of this initiative is fabulous, the lectures are excellent and the impact is great.many thanks opentution.God bless u
That is amazing!, Thank you
nice job……………hatx offfffffff to teacher
tks
Thank you John Moffat!
Thanks for being so intelligent to explain the things so simple!
Wish you all the best!
Can I download this video lecture? How
very clear, thank you
Sorry ,I still do not konw the dicount factor for perpetuity is 1/r( cost of capital)?Thank you!
perfect.
Hi ,
Are there tutorials available for ARR and payback period
@rmracca, http://opentuition.com/acca/f9/investment-appraisal-methods-accounting-rate-of-return-payback-period/
thanx John Moffat for making this so simple to understand
wow
great
lovely