Discounted Cash Flow – Annuities and Perpetuities – ACCA Financial Management (FM)
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in section A and B of the exam , do we not get marks if we make rounding errors?
Hi John,
Pls can you clarify when we should use annuity table or the present value table. I tried attempting some questions and don’t know which table is applicable to them.
Thank you.
We use the present value table for individual flows. We use the annuity tables to discount when there are equal flows each year.
how do we calculate the annuity for 2-6 years?
Subtract the 1 year factor from the 6 year annuity factor – exactly the same logic as shown in the examples in the lecture.
Hi John
”
In example 7 “at time 17.52” did you mean 1 / 0.05 interest?
Yes, but I am not going to re-record the lecture because I do ‘speak’ it correctly and solve the example correctly 🙂
(2,000×1.03)÷(0.1?0.03) × 0.621
= 18 275
I used the same LOGIC as dividend growth model FORMULA. That’s what I think
@syedhamza15
the divorce example made me laugh so hard.. thanks
🙂
Than you Sir for all the brilliant lectures.
While calculating the Present Value of the Perpetuity in example 7 from both the approaches, there’s a difference coming in them. Can you please tell me which approach is the best to follow?
And again thank you for all the lectures.
Any difference will just be a rounding difference because of the tables only being to 3 decimal places.
The rounding difference will be irrelevant in the exam.
A perpituity of 2000 starting in 6 years time growing at 3% p.a Interest rates are 10%
Find Present Value.
any ones help will be appreciated
Is the 2000 amount growing by 3% every year, starting from 6th year?
Thanks for this one. I personally prefer the second approach used to determine the PV under perpetuity.
You are welcome 🙂
cindy1228: The question says that the first flow is at time 4. Therefore the second flow is a time 5, the third flow is at time 6, and so on.
If you carry on counting you will find that the 10th (and last) flow is at time 13.
Hi John,
May I ask why its 13 years? since it states 4 years at 20k p.a then 10 years thereafter? thank you
Hi sir, l didnt understand the second way of calculating the discount factor of the perpetuity in example seven.Perpetuity is where you receive the same amount to infinity so you got the perpetuity from 1 to infinity but then l didnt understand why you multipied by the discount factor for 4 years from the present value table.Thank you
Multiplying by 1/r gives the present value at time 0 if the first flow is in 1 years time.
Here the first flow is in 5 years time, which is 4 years later than in 1 years time. Therefore it gives a PV 4 years later as well – at time 4 instead of time 0. So we have to multiply by the normal 4 year discount factor to get back to a value at time 0.
If you are still unsure then do watch the free Paper MA lectures, because this is revision of MA (was Paper F2).