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Good day sir, please I need you to help differentiate instances when and when not to calculate perpetuity on the initial amount based on questions 106 and 110 of BPP. thank you sir.
Two things.
Firstly, if there is inflation (as in 110) then we use the real discount rate on the current price flows. My free lectures on investment appraisal will help you on this.
Secondly, multiplying by 1/r when discounting gives a PV now if the first flow is in 1 years time. If the first flow is in 2 years time (as in 110), then because it starts 1 year later, then PV you get is 1 year late – i.e. at time 1 – and needs discounting for 1 year to get to a PV now.
The F2 lectures on investment appraisal will help you with the second bit.
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