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 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).

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faith20ul19 says

Thanks for this one. I personally prefer the second approach used to determine the PV under perpetuity.

John Moffat says

You are welcome 🙂

John Moffat says

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.

cindy1228 says

Hi John,

May I ask why its 13 years? since it states 4 years at 20k p.a then 10 years thereafter? thank you

jagmeet says

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

John Moffat says

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).