Dear tutor,
I want to ask you about this question which interpret the way to calculate annuity factor when cashflow in perpetuity. It confuses me
" A co. Receives a perpetuity of $20,000 pa in arrears, and pay 30% corporation tax 12 months after the end of the yr to which the cash flows relate. A c.o.c of 10%. What is the after tax pv of the perpetuity?"
And its answer:
Pv of perpetuity :
20,000/0.1 = 200,000
Pv of tax:
20,000x30%x AF (yr2-indefinite)
AF (yr2-indefinite) = 1/0.1- DF yr 1
= 10- 0.909 = 9.091
( can you explain for me this formula, im not quite clearly understand about this)
Other than that it's ok
Ask the Tutor ACCA FM
Advanced DCF & taxation
9y ago#1Have you watched my free lectures (and if necessary the F2 lectures on this, because this bit is revision of F2).
The thing is that 1/r gives the present value of a perpetuity starting in 1 years time.
Here, the tax starts in 2 years time (which is 1 year later than in 1 years time), so using the 1/r gives a present value 1 year later as well, so it needs to be discounting by 1 more year in order too get a present value now. (and the factor for discount for 1 more year at 10% is 0.909).
You can either discount by 1/r and then discount by one more year (as explained above).
Alternatively, you can get the discount factor for 1 to infinity (1/r) and then subtract the discount factor for 1 year (0.909) to end up with the factor for 2 to infinity.
Both ways will give the same answer - maybe a little difference because the tables are rounded to 3 decimal places, but that is not relevant for the exam and would not lose any marks.
Ok i understand.
thank u for your kind
9y ago#3You are very welcome :-)
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