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Sir, if I end up with a Discount Rate of something like 7.587, how am I supposed to find the relevant annuity factor?
Thanks in advance.Do you mean that you get an interest rate of 7.587%?
If you do mean that, then you use the formula for the annuity factor which is at the top of the annuity tables. However, you would almost certainly get full marks if you used 8% as an approximation and then use the tables directly.
This was in relation to qn Lignum (Dec ’12) , where the real required rate was 7.692%, and in order to find the PV of the annuity of €6m, a annuity factor using 7.692% was calculated as 1/0.07692 [1 – 1/(1.07692^12) ]
Should do I do the above or can I approximate the DR to 8% and compute the PV of the annuity?
The answer is the same as I wrote before!!!
Ideally you would work out the annuity factor precisely using the formula printed at the tope of the annuity tables (which is what you have typed out). However, it would be acceptable to use 8% and therefore use the annuity factor straight from the tables.
(Are you sure you mean Lignum? Using an annuity factor is not needed in Lignum.)
Oh. I never noticed the formula at the top of table! Very careless of me!
But yes sir, I was referring to Lignum, where the production cash flow in relation to the BSOP model needs to be discounted using an AF in order to arrive at Pa. 🙂
And thanks for your help. 🙂
No problem 🙂
(although I do not know where you are finding Lignum – the actual exam question from December 2012 is about foreign exchange risk management and there is nothing in it that is anything to do with BSOP 🙂 )
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