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Are the discount factor and the PV factor the same thing?

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Are the discount factor and the PV factor the same thing?

  • This topic has 3 replies, 2 voices, and was last updated 10 years ago by John Moffat.
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  • November 9, 2014 at 3:32 pm #208635
    petjumpjump
    Member
    • Topics: 12
    • Replies: 5
    • ☆

    An organization with a cost of capital of 14% plans to invest in a project costing $500,000. The project will yield nothing in Year 1, but from Year 2 would yield cash inflows of $100,000p.a. in perpetuity. Access its feasibility.

    This is an example of Bpp textbook. And the answer is:
    year CF discount factor present value
    0 (500,000) 1 (500,000)
    1 0 0.877 0
    2-? 100,000 1/0.14*0.877 626,429

    And I wonder why it is 1/0.14*0.877 instead of 1/0.14-0.877 here because another similar example presented later offer the PV factor=(factor 1-?)-(factor yr1), and I think the later formula makes more sense.

    Could you please tell me whether discount factor and the PV factor are the same thing?
    Whether I am right to calculate in 1/0.14 minus 0.877?

    I’ve calculated this and it seems to be only rounding errors?

    November 9, 2014 at 5:40 pm #208655
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    You can calculate the factor either way.

    For 2 to infinity, you can either take 1 to infinity and subtract the factor for 1 year (which is perhaps the most obvious way.

    Alternatively, you can take 1 to infinity, but then multiply by the 1 year factor because the perpetuity starts one year late (it starts at time 2 instead of time 1).

    Both ways give the same answer (apart from rounding differences, because the tables only go to three decimal places). Rounding differences are irrelevant in the exam – they are marking your workings.

    The present value factor is the discount factor!

    November 11, 2014 at 5:18 am #208949
    petjumpjump
    Member
    • Topics: 12
    • Replies: 5
    • ☆

    thanks??

    November 11, 2014 at 9:13 am #209022
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    You are welcome 🙂

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