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 9 years ago by John Moffat.

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- November 9, 2014 at 3:32 pm #208635
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*0.877 626,429And 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 #208655You 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 #208949thanks??

November 11, 2014 at 9:13 am #209022You are welcome 🙂

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