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sir my questions are regarding the timings 1- a company recieves a perpetuity of 20000 per year in arrears this means that he recieves this 20000 at t2? normally we assume that cash flows are recieved at the end of the year which is t1 so here if it is in arrears so t2 right?- second part of the question says 2- pays 30% corporation tax 12 months after the end of the year to which the cash flows relate .now reading the answwer it says that the tax is paid in arrears so the if cash flows are recieved at t2 then tax should be paid at t3 but the answer shows that 20000 is assumed to be recieved at t1 ignoring the arrears because he simply multplied 20000 by 1/r which is 1/0.1 ie 10% cost of capital even if the cash flows are recieved in perpetuity in arrears why havent they removed 1 year annuity factor from 10 and then calculte perpetuity .
Wrong.
0, 1, 2 etc are not years, they are points in time that are 1 year apart.
Time 0 is ‘now’, and is the start of the first year.
Time 1 is in 1 years time. i.e. the end of the first year/start of the second year,
Time 2 is the end of the second year/start of the third year
And so on.
We always assume that the operating flows occur in arrears (i.e. at the ends of each year) unless specifically told otherwise. Therefore in your example the first flow is at time 1.
I do explain this in my free lectures.
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