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Ayr is planning on paying £300 into a fund on a monthly basis starting three months from now, for twelve months. The interest earned will be at a rate of 3% per month. What is the present value of these payments?
A £2,816
B £2,733
C £2,541
D £2,986.ans.
PV = 300 x 11·30 ? 300 x 1·913 (from tables) = £2,816 or PV = (300 x 9·954) x 0·943 = £2,816struggling to understand why 300*9.54 is later multiplied by 0.943
If the first payment was in 1 months time, then we would simply multiply by the 12 period annuity factor at 3% (9.954) to get the PV.
Multiplying by the annuity factor gives the PV when the first flow is in 1 periods time.
However here, the first flow is in 3 periods time (which is 2 periods later than in 1 periods time). So multiplying by the annuity factor gives the PV at period 2 (2 periods later than ‘now). We therefore need to multiply by the discount factor for 2 periods at 3% to get the PV ‘now’.
ohh ohhh I understood. In the first period it is like 1*Annuity factor, which is normally we do, when period of cash flow changes then we should multiply with discount factor of corresponding period for finding PV.
So I am having a doubt what if there is no cash flow in between periods, how do we solve that.?
(i know this might not be in the syllabus)It depends on exactly what you mean. It might mean having to discount each flow separately.
Have you watched my free lectures on this? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well 🙂
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