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Hi John
in the lecture for chapter nine- DCF (part 4):
the perpetuity starts in year four, however you use the discount rate for three years to value it. i find this confusing, because the one year income was discounted at one year’s rate (instead of being left non-discounted), and the perpetuity still falls four years away from the current point in question.
why don’t we discount the perpetuity for four years?
is it because we consider it as though it were starting in a year (like the first cash flow)?
thank you.
The discount factor for a perpetuity that starts in 1 years time is 1/r. This gives a PV at time 0.
If the perpetuity starts at time 4, then this is 3 years later than starting at time 1 and so it gives a PV 3 years laters also and so needs discounting for 3 years.It might help you to watch the Paper MA (was F2) lectures on discounting, because I do explain this there with examples.
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