- This topic has 3 replies, 2 voices, and was last updated 11 years ago by
.
- Posts
Hi sir,
for the discount factor of annual operating surplus, why it is 14.11 x 1.1*-3 and not 14.11 x 1.1*-4 since it is on time 4?
If the flow had started at time 1, then you would have just used 14.11 (the annuity factor for 30 years) and this would have given a present value at time 0.
However it starts 3 years later (at time 4 instead of time 1) and so multiplying by 14.11 will give a value 3 years later also (at time 3 instead of time 0).
So we need to discount by three more years to get the present value.
Why we discount by 3 more years? the surplus starts at time 4, why we do not discount by 4 more years (14.11 x 1.1*-4)?
As I wrote before, if it started in 1 years time then you would get a present value at time 0.
If it started in 2 years time you would get a present value at time 1.
It starts in 4 years time, so using the annuity factor gives a present value at time 3.
The annuity factor discounts the flows by 1 year, 2 year, 3 year and so on.
- You must be logged in to reply to this topic.