- This topic has 3 replies, 2 voices, and was last updated 6 years ago by
.
- Posts
Hi Sir. I have a question.
What is the amount to be invested today to receive $2,000 per annum for 9 years starting with the first receipt beginning in 4 years’ time. The interest is assumed to be 5% per annum.
A. $10,600
B. $11,200
C. $11,700
D. $12,200The answer is B which is (AF 5% 11 years – AF 5% 3 years) x $2,000 = (8.306 – 2.723) x $2,000 =$11,166 (nearest is $11,200)
But shouldn’t the answer be C sir?
(AF 12 years – AF 4 years) x $2,000 = (9.394 – 3.546) x $2,000 = $11,696 (nearest $11,700)Thank you sir.
Assuming that you have copied everything correctly, then neither answer is correct!
The first receipt is in 4 years time. There are 9 receipts in total, so the last receipt is in 12 years time.
Therefore we need the total factor for years 4 to 12. We get this by taking the total factor for 1 to 12 (the 12 year annuity) and subtracting the total for 1 to 3 (the three year annuity).
So: (8.863 – 2.723) x 2000 = 12,280Do check that you have copied the question correctly.
(And do watch my free lectures on this. The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.)
Thank you so much sir! Brilliant!!
Yes i copied the question correctly. Unfortunately the suggested solution and my understanding was wrong at the beginning.
But now I have fully understood
Thanks so much! 🙂
- The topic ‘Discounted Cash Flow’ is closed to new replies.