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cash flows in perpetuity

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › cash flows in perpetuity

  • This topic has 1 reply, 2 voices, and was last updated 11 years ago by John Moffat.
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  • May 15, 2014 at 12:53 pm #168894
    biya14
    Member
    • Topics: 15
    • Replies: 4
    • ☆

    when cash flows are in perpetuity & these cash flows have to be discounted then why 1/r is used ? , please explain this

    May 16, 2014 at 5:21 am #168984
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    This is right back to paper F2!!

    Suppose I was supposed to pay you 10,000 a year for ever, and the interest rate is 10%.

    Rather than have to keep paying you 10000 every year, I could just put 100,000 in the bank for you now, and with interest of 10% a year it would generate 10000 a year for ever and I could then forget you. The two would be equivalent.

    How did I know it would need 100000? I worked backwards and divided 10000 by the 10% interest rate.

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