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Arriving at Annuity (PV / df)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Arriving at Annuity (PV / df)

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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  • April 15, 2018 at 7:41 pm #446776
    dimeroglev
    Participant
    • Topics: 9
    • Replies: 5
    • ☆

    Question:
    PV at 10%
    0 Cost $1.500,000 in 5 years * df 0.621 = $ 931,500

    0-4 Annuity * (1+df @ 10%) = $ 931,500

    0-4 Annuity = $ 931,500 / (1+df @ 10%)

    0-4 Annuity = $ 931,500 / (1+3.170)

    0-4 Annuity = $ 931,500 / 4.170 = 223,381

    Why is there a 1+ on the discount factor? …the df 0-4 at 10% +1? why +1?
    this is revision kit question 104 answer on page 127.
    Thanks in advance.

    April 16, 2018 at 8:12 am #447161
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    The annuity factor applies to flows from time 1 onwards.

    So for 1 to 4 you would multiply by the 4 year annuity factor to get the PV.

    The PV of a flow at time 0 is 1 x the flow, so the factor for flows from 0 to 4 is 1 plus the 4 year annuity factor.

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