Delayed Perpetuity + Net Present Value

Time 0 is 31 December 2016. The investment is made in 1 years time. The returns also start in 1 years time. Therefore the cash flows are: 1 (100,000) 1 to infinity 13,000 p.a. You then discount both in the normal way and you will arrive at an NPV of $39,090 Have you watched my free lectures on this? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.

Hello sir, i was going through this qn. But still dont get it. When you say discount both in the normal way how. For the 100,000 its on year 1 not on year 0. So do we discount it using the simple discounting formulae of X × (1+r)^-n and get $90909. Then for the 13000 we discount it using the perpetuity formula which is X × (1÷r) And get $130,000. So we take $90909 - $130,000 = -39090. Is this how its done. If yes, the NPV is a negative but the answer is in positive, so can u ignore the negative in this case?

The NPV is not negative!!!! The PV of the 13,000 per year is + 130,000 because they are cash inflows. The PV of 100,000 in 1 year is - 90,909 because it is a cash outflow. Therefore the NPV is 130,000 - 90,909 = + 39,091. Have you actually watched my free lectures on this?

Ow yes! I guess I just confused myself at the end. Actually I haven't yet watched it, I better watch it right away. Thank you so much sir John :)

You are welcome.