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What is the value of an investment that pays $15000 every other year forever, if the first payment occurs one year form today and the discount rate is 10% compounded daily? What is the value today if the the first payment occurs four years from today?
I am not sure how to solve this problem. Can you give me some guidance? Thanks.
It would be almost impossible for this to be asked in the Paper F9 exam, because basic discounting is tested in Paper F2 – Paper F9 is more concerned with arriving at the cash flows to be discounted. (And even in Paper F2 this is very unlikely to be asked.
However, since the inflow is received every 2 years, then you discount in the normal way but with the time period being 2 years instead of the normal 1 year.
So you use the 2 year interest rate, which is 21% ( (1.10^2 – 1).
So the PV of the perpetuity would be 15,000 x 1/0.21However this would only be the answer if the first receipt was in 1 periods time (which here means in 2 years time). In fact the first receipt is in 4 years time which is 2 periods not 1 period. So you would then need to discount the answer above for 1 more period at 21% by multiplying by 1/1.21
Again though – this is not the sort of thing that the F9 examiner is at all likely to ask.
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