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An investment will produce an annual return of $1,500 in perpetuity with the first receipt starting in
3 years’ time.What is the present value of this perpetuity discounted at 6%?
A $21,000
B $22,250
C $25,000
D $25,250There is no point in simply setting me test questions and expecting an answer!
You must have an answer in the same book in which you found the question – you should ask about whatever it is in the answer that you are not clear about and then I will help you.
To get the discount factor for 3 to infinity, multiply the discount factor for a perpetuity by the 2 year present value factor (because the perpetuity is starting 2 years late – at time 3 instead of at time 1).
This is all explained in my free lectures on discounting. The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
Multiply by 1/0.06 for the perpetuity, and then multiply by the 2 year present value factor because the perpetuity starts two years later.
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