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Hi,
Hope your are well.
Question:
Pauli plans to buy a holiday villa in 5 years time for £1.5m . He plans to set aside the same amount each year for 5 years starting immediately with interest of 10% compounded.
How much does he need to set aside each year?PV of holiday home 1500000*0.621= 931,500
But when he gets to calculating those yearly payments they have used an annuity discount factor of 4.170 (4year annuity factor of 3.170+1)
931500/4.170= 223381Please could you explain why they divided the PV of the holiday home by 4.710 instead of the annuity factor for the 4years of 3.710. I just cannot understand why 1 has been added to this factor.
Many thanks in advance.
It’s quite simple
The question says each year for 5 years starting immediately with interest of 10% compounded.
That means one instalment is now
Anything, any cash flow now is * by 1 because it’s not in the future
So four in the future are the same value that’s why you use an annuity factor for 10% 4 yearsHi,
Literally shortly after sending the question to you I understood where I was not understanding the question. It’s the fact that a payment is paid immediately. Okay, got you! Really appreciate you explaining that to me.
Thank you!
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