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Sir, Could you please assist me with this question,
What is the PV of $200 incurred each year for four years, starting in three years’ time, if the discount rate is 5%?
Soln: PV of cash inflow (under perpetuity)= Annual cash inflow × 1÷R
= 200×1÷0.05 = 200÷0.05= $4000
Sir, Could you please tell me whether it is correct or not?No, it is not correct. Multiplying by 1/r gives the present value when the first flow is in 1 years time and only when the flows are in perpetuity.
Here, there is a four year annuity that starts in 3 years time.
I do explain exactly how to deal with this in my free lectures on discounting, and you cannot expect me to type out my lectures again here 🙂
The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Ok, Thank you, Sir, Now I have understood where I made the mistake.
Thank you very much for your response, Sir and for providing free excellent lectures for ACCA students.
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