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Dear Mr Moffat
I came across this question and just to make sure that I have understood correctly what you said in your explanation, could you please check the working of below question ?
What is the present value of $ 8,000 first receivable in 4 years time and thereafter every year in perpetuity?
Cost of capital 6%Working : 8,000/0.06 = $ 133,333
Less annuity discounted factor
(2,673) $ 21,384Total perpetuity $ 111,949
Your explanation
“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?
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.
Or
Use 1/r for the perpetuity, and then subtract the three year annuity discount factor ( so as to be left with 4 to infinity)”Thanks
Gabbi
Your workings are correct (you have used the second of the two ways).
You don’t need to learn two ways, even though the other way would give the same answer (any difference are just due to roundings in the tables, which does not matter for the exam).
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