In example 5 on annuity… when we get the answer 80440 as u did in the video, do we not have to discount it further to get a present value in year 0..?
its like we calculated the value in year 4 but year 0 (now) we didn’t..

The first receipt is at time 4, and because there are 10 receipts, the last receipt is at time 13.

You can get the answer in one of two ways – it doesn’t matter which, so whichever you find more obvious.

One way is the take the annuity factor for 13 years (which would give a PV for all 13 years) and subtract the annuity factor for 3 years. That leaves you with a factor for time 4 to time 13.

The alternative is to take the annuity factor for 10 years (because there are 10 years of flows), and then discount by the ordinary present value factor for 3 years (because the annuity starts 3 years at time 4 instead of time 1).

Both ways give the same answer (they will be a little different because of the roundings in the tables, but that is irrelevant in the exam).

(If you are still unsure it will help you to watch the relevant F2 lectures because it is revision of F2)

First, there is no such thing as an ‘advanced perpetuity’! I can only guess that you mean a perpetuity that starts later than at time 1 – but that is still a perpetuity by definition!!

Second, it is extremely rare for perpetuities to occur investment appraisal questions at Paper F9 (they are relevant when calculating cost of equity, but that is dealt with in the lectures on the cost of equity). You will find it difficult (if not impossible) to find any past exam questions in the past five years that have a perpetuity existing in an investment appraisal question. We are teaching to pass the exam, not simply play around with numbers.

Thirdly, dealing with annuities (which do occur often in F9) and perpetuities (which don’t) are both pure revision from Paper F2, so if you have forgotten how to deal with them then you should watch the relevant F2 lectures.

In this Annuity Lecture , why you have removed the 1-3 years although we know that the first Receivable would be in Year 4 and last would be in Year 13 so I am little confused that why the 1-3 years are removed .

Hi Hailu, the video works for me. The problem could be the internet browser you are using. You may consider a different internet browser (firefox, google chrome, operamini, etc)

The standard of your teaching is simply OUT OF THIS WORLD!! You take so much care in highlighting the crucial points and normal Pitfalls, for students. I cannot thank you enough. My God bless you for your beautiful contribution.

Thank you so much Mr Moffat. YOu are an amazing teacher . Everything makes so much sense now and in fact I have gone from hating this paper to loving it. Open tuition thank you.

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

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).

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).

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!)

Satiam says

In example 5 on annuity… when we get the answer 80440 as u did in the video, do we not have to discount it further to get a present value in year 0..?

its like we calculated the value in year 4 but year 0 (now) we didn’t..

John Moffat says

The first receipt is at time 4, and because there are 10 receipts, the last receipt is at time 13.

You can get the answer in one of two ways – it doesn’t matter which, so whichever you find more obvious.

One way is the take the annuity factor for 13 years (which would give a PV for all 13 years) and subtract the annuity factor for 3 years. That leaves you with a factor for time 4 to time 13.

The alternative is to take the annuity factor for 10 years (because there are 10 years of flows), and then discount by the ordinary present value factor for 3 years (because the annuity starts 3 years at time 4 instead of time 1).

Both ways give the same answer (they will be a little different because of the roundings in the tables, but that is irrelevant in the exam).

(If you are still unsure it will help you to watch the relevant F2 lectures because it is revision of F2)

mehreen245 says

why have you not discussed advanced perpetuities

John Moffat says

First, there is no such thing as an ‘advanced perpetuity’! I can only guess that you mean a perpetuity that starts later than at time 1 – but that is still a perpetuity by definition!!

Second, it is extremely rare for perpetuities to occur investment appraisal questions at Paper F9 (they are relevant when calculating cost of equity, but that is dealt with in the lectures on the cost of equity). You will find it difficult (if not impossible) to find any past exam questions in the past five years that have a perpetuity existing in an investment appraisal question. We are teaching to pass the exam, not simply play around with numbers.

Thirdly, dealing with annuities (which do occur often in F9) and perpetuities (which don’t) are both pure revision from Paper F2, so if you have forgotten how to deal with them then you should watch the relevant F2 lectures.

Ahmad Masood Faqiri says

Dear John Sir,

In this Annuity Lecture , why you have removed the 1-3 years although we know that the first Receivable would be in Year 4 and last would be in Year 13 so I am little confused that why the 1-3 years are removed .

John Moffat says

The 13 year annuity factor is the total of the discount factor from years 1 to 13 inclusive.

We want the total factor for years 4 to 13, so we need to remove the total for years 1 to 3, i.e. the 3 year annuity factor.

aliimranacca007 says

But 1st 4 years plus next 10 year become total 14 how 13 ? i am confused plz tell me

John Moffat says

The first receipt is in 4 years time – time 4.

The second receipt is at time 5

The third receipt is at time 6.

If you carry on (and use your fingers to count!) then if there are 10 receipts the last receipt is at time 13.

Musa says

Thanks. It worked. I downloaded Google Chrome.

Musa says

Hi, did anyone got this video to work?

Musa

John Moffat says

The lecture is working fine. Have you checked the technical support page? The link to it is above.

opiod says

Hi Hailu, the video works for me. The problem could be the internet browser you are using. You may consider a different internet browser (firefox, google chrome, operamini, etc)

Thanks.

henahailu2 says

Dear Opentuition team,

the video is not being seen in my computer.

please help

please.

Regards

Henok Hailu

ACCA Student

John Moffat says

Have you looked at the technical support page? The link to it is above.

reeb1350 says

Dear John,

You really make the problems look easy. All credit to you. Your explanations are very concise and to the point. Thank you so much.

vijay says

Dear Mr Moffat

The standard of your teaching is simply OUT OF THIS WORLD!! You take so much care in highlighting the crucial points and normal Pitfalls, for students. I cannot thank you enough. My God bless you for your beautiful contribution.

Many thanks

Vijay

John Moffat says

Thank you

lydiankala says

Do we have annuity tables in the exam

John Moffat says

Yes – I make this clear in the very first lecture for F9!!!!

You get given the present value tables, the annuity tables, and a formula sheet

iluvgorgeous says

Thank you so much Mr Moffat. YOu are an amazing teacher . Everything makes so much sense now and in fact I have gone from hating this paper to loving it. Open tuition thank you.

John Moffat says

Thank you

sneha g says

Just a doubt… Are we marked per step for our answers when it comes to sums ??

John Moffat says

Yes – each step is marked separately (they do not just mark the final answer)

acnca says

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

tennyson123 says

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.

John Moffat says

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.

y10829 says

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!

lukedavidizard says

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).

John Moffat says

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).

y10829 says

thank you, john. i understand now!

ntasu says

thanks! well explained and made easy to understand.

cherryhoe says

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.

hasanali95 says

these figures are in the present value table so no need to calculate

John Moffat says

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!)

eadinnu says

Excellent

nisi11 says

great

jeweltrinidad says

John you are amazing in helping us.