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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Discount factor
Hello Tutor
As I had watched the lecture, there have 2 methods to calculate the PV of cash flow(The cash flows do not start from time 1 /year 1 and the cash flows are constant)
one is the annuity factor deducted the annuity factor from y1 to y2 (if its start from y3 onwards to yr10)
another one is the cash flows times the annuity factor (from y1 to y10) then times the discount factor at y2 to discount back the cash flows to y0
As I have tried 2 methods in some question, these two methods will produce a much different answer, and sometimes the examiner will use either method in past year question
hence, Its both will be accepted and correct in the exam although it might be not the same?
Thank you.
The two methods do not give much different answers (a small difference due to rounding, but that is all).
If the flows are from time 3 to time 10 (which is 8 years in total), then you either:
1) Take the 10 year annuity factor and subtract the 2 year annuity factor
or
2) Take the 8 year annuity factor and multiply by the 2 year ordinary present value factor.
Either method is accepted, but they must give the same answer (subject to rounding) – there cannot possibly be different answers when it is basic discounting!