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Goodevening dear sir,
In the 1rst question of practice questions of FM’s chapter 7, why the PV isn’t
12000 x (1/0.11) and it’s 12000+[12000*(1/0.11)] ?Many thanks
Multiplying by 1/0.11 gives the present value of a perpetuity starting in 1 years time, so for the flows 1 to infinity.
However this question says that the first flow is immediate i.e. at time 0. So in addition to the flows from 1 to infinity there is also a flow of 12,000 ‘now’ and the PV of 12,000 ‘now’ is 12,000 🙂
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