coz for question 2, i calculated the annuity for year 2 and then discounted it and for question 3, this was wat i did ….1+0.18-1=18…this is from the formula (1+m)=(1+r)(1+i) but since there was no inflation, the effective interest is = to the nominal interest of 18%

For question 2, the first flow is in 3 years time and the last flow is in 10 years time.

You take the 10 year annuity factor and subtract the 2 year annuity factor – this will give the total factor for years 3 to 10. (Alternatively you can take the 8 year annuity factor (because there are 8 years of flows) and then multiply by the 2 year normal discount factor (because the annuity starts in 3 years time instead of in 1 years time, so starts 2 years late).

Have you watched my free lectures on this? They are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.

Kay says

Hey Mr Moffat in question 5 after getting the $63,158 why do we need to add back the $6000?

John Moffat says

Because the first receipt is immediately. Multiplying by 1/r only deals with a perpetuity that starts in 1 years time.

nghacastro says

coz for question 2, i calculated the annuity for year 2 and then discounted it

and for question 3, this was wat i did ….1+0.18-1=18…this is from the formula (1+m)=(1+r)(1+i) but since there was no inflation, the effective interest is = to the nominal interest of 18%

John Moffat says

For question 2, the first flow is in 3 years time and the last flow is in 10 years time.

You take the 10 year annuity factor and subtract the 2 year annuity factor – this will give the total factor for years 3 to 10.

(Alternatively you can take the 8 year annuity factor (because there are 8 years of flows) and then multiply by the 2 year normal discount factor (because the annuity starts in 3 years time instead of in 1 years time, so starts 2 years late).

Have you watched my free lectures on this? They are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.

John Moffat says

For question 3, the yearly rate is 1.015^12 – 1 = 0.1956 (or 19.56%)

( 0.015 because it is 1.5% per month; to the power of 12 because there are 12 months in a year)

Again, I do suggest that you watch the lectures before attempting the tests.

nghacastro says

greetings sir John…please i dont understand how the answers to question 2 and 3 were gotten…