- This topic has 1 reply, 2 voices, and was last updated 1 year ago by .
Viewing 2 posts - 1 through 2 (of 2 total)
Viewing 2 posts - 1 through 2 (of 2 total)
- You must be logged in to reply to this topic.
OpenTuition recommends the new interactive BPP books for June 2024 exams, Get your discount code >>
Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › BBP question _DF timeline
AM Co will receive a perpetuity starting in 2 years time of $10,000 per year, increasing by the rate of inflation which is 2%.
What is the present value of this perpetuity assuming a money cost of capital of 10.2%.
Dear Tutor,
I have read the answer in BBP practice book and the answer for above question is $115,740
After got the real rate of 8% , they then said the perpetuity factor from T2= (1/r)-DF1= (1/0.08)-0.926=11.574
My question is why taking the DF1 only? Shouldn’t it be DF2 which is 0.826? I mean the question also said the perpetuity start in 2 years time. Why the answer only subtract the DF for 1 year only?
Thank you
The flows are from time 2 to infinity.
The discount factor for a perpetuity (1/r) gives the PV from flows from time 1 to infinity, so subtracting the 1 year discount factor gives the factor for 2 to infinity.
Our free Paper MA lectures on discounting will help you with this (because this part is revision from Paper MA).