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Greetings sir.
Q112. If the question says “perpetuity in arrears” – does the word “arrear” have an impact when calculating present value ?
I checked the answer and it was calculated as normal : amount/r
And tax was calculated with present value of 1.I had thought: due to “perpetuity in arrears” we would have to find amount/r and then find present value of 1 yr. And as for tax, of 2yr because it comes 1yr later of cash flow. And the cash flow should appear 1yr later as it is perpetuity.
I’m confused. Please help elaborate and clarify the confusion.
In arrears means that the first flow is at the end of the first year i.e time 1.
Had it been in advance it would have meant that the first flow was at the start of the first year i.e. time 0.
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