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  2. dear sir ,
    thank you so much for the lecture it was very helpful
    however i was wondering if may tell me wht in the lecture the formula for perpetuity is 1/R and in the notes A/R
    looking forward to your reply
    thank you

  3. Hi sir, can you please explain if in a similar case of perpetuity, as you discussed, if cash flows were being received, say, quarterly or six monthly, then how we calculate PV, because 12% is the yearly rate. Are we suppose to divide this rate, like 6% for six months or 3% for three months?

      • There is such an example in the book, where an investment (PV) of $95 generates an interest of $ 12 per annum, indefinitely. It says that interest is paid half yearly, that is $6 every six months. In order to calculate (r), they have used the compounding method:-
        [1+(6/95)]^2 -1 = 13%
        In this case, why can’t we use the same method, by reversing the formula.
        6/r = 95 therefore 6/95 = r. So r will be 6.3% per annum and (6.3/2) = 3.1% half yearly.

      • The other way of getting the same answer is to multiply by the 9 year annuity factor, but then to multiply by the ordinary 3 year present value factor, because the annuity starts in 4 years instead of in 1 year, so 3 years late.
        This will give the same answer (apart from roundings, which is irrelevant).

        The annuity factor on its own only works from annuities starting in 1 years time.

      • Do you mean this way?
        annuity
        1000[1-(1/1.08^9)] / 0.08=6246.88
        pv
        [1/1.08^3]=0.794
        6246.88×0.794= 4958.9

        i think i got it, thank you!!

      • You are welcome (although remember that you get given the annuity tables in the exam, so you don’t need to use the formula 馃檪 )

    • In the same way as for annuities that start late.

      If the first payment is in 4 years time, then you take the factor for the perpetuity (1/r) and subtract the 3 year annuity discount factor. You are left with the discount factor for 4 to infinity.

  10. What I don’t get is that calculating the present factor is quite easy with the calculator, the calculators do have the raise to power button, pressing it a little box appears above the value and you can put any number of years you want there.

    • If you look at the lecture again, you will see that I am multiplying 1,500 by the discount factor. The discount factor is 1/(1.064^2)

      0.064 because the rate of interest is 6.4%. To the power 2 because we are discounting for 2 years.

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