- This topic has 11 replies, 3 voices, and was last updated 12 years ago by
.
- Posts
1. How we calculate present value of $ 10,000 occurring in years
2,4,6,8…… To perpetuity ?
And years 1,3,5,7,…… To perpetuity?
2. We have formulae for the present value and future value of oridinary annuity i.e;
PV= 1 (1 i)-n/i
FV= (1 i)n-1/i
Please mention PV, FV formulae for calculating annuity due ?
Thanks and regards,
Noman TufailI think we can do by the help of Annuity Table
I may be wrong but see this;
2=2 (In table), 4=4 (Value for 4th year in table), 6=6 (Value for 6th Year in table) and in 8th year use perpetuity method means dividing cash flow with respective discount rate and then discount with 8th year’s rate.
We will assume today as ‘0’ and then 2 year value in discount table and same for odd numbers…..I think there should be specific formula for that Plz Sir John comment on this
But dear i dont think that we will get right answer this way. Because for perpetuity we use 1/r. There should be some effective rate for even/odd year occurring cash flows. So that we use that effective rate instead of “r” in formula.
I think rate should be given….otherwise we will be doing Algebra in P4…..
Sir John plz!!!
If it is 2, 4, 6, 8 to perpetuity, then simply multiply by 1/r, where r is the 2 yearly rate instead of the 1 yearly rate.
(To get the 2 yearly rate, then (using 10% as an example) 1+r = 1.1^2 = 1.21, so r = the 2 yearly rate = 0.21 (21%))If it is 1, 3, 5 to perpetuity, then because there are 2 year gaps you would do the same as above. However, because it starts 1 year earlier, multiplying by 1/r would give a PV at time minus 1! So to get to a PV at time zero you need to multiply the answer by 1+r where r is the one yearly rate.
I don’t really understand your second question.
Sir my question was that
Usually we use annuity table for finding the annuity factors. But sometimes we have to use formulas for finding the annuity factors because required discount rates are not present in the table e.g. we cant find 17.5% in annuity table.
So we have to use formulae for finding the present value of oridinary annuity i.e;PV annuity factor= 1-(1 i)-n/i
and future value of oridinary annuity
FV annuity factor = (1 i)n-1/i
Please guide me that how we should adjust these formulae of PV annuity factor and FV annuity factor if there is annuity due instead of ordinary annuity??
ThanksThe examiner does not expect you to calculate the discount factor – using the nearest percentage and using the tables is good enough. (Some answers do calculate it exactly but it is not necessary).
What do you mean by an annuity due? The word annuity simply means an equal amount each time – there is only one type of annuity 🙂Sir Annuity due i mean annuity which is paid at the begining of year and ordinary annuity i mean annuity which is paid at the end of year
Secondly sir in your reply to even/odd perpetuity.
For 2,4,6 to perpetuity annuity, shouldnt the 1/r formula give value at year 1 and then we will discount it for 1 year to get value at year 0. And for 1,3,5 to perpetuity annuity the 1/r formula give value at the year 0 and therefore no adjustment is required. My understanding was that the annuity formula 1/r give present value one year before the value of “n”.In reply to your question about an annuity paid at the beginning of the year – the annuity factor gives the present value for an annuity starting at time 1. If the annuity starts at time 0 then you simply add on the amount of the flow at time 0.
In reply to your second question, it is is 2, 4, 6 etc and a perpetuity, then using 1/r when r is the two yearly rate will give the present value at time 0. (0, 1 etc are points in time – not years).
The reason is that if you use the 2 yearly rate, the time 2 is one period away, time 4 is 2 periods away and so on.
My original answer was correct.
- You must be logged in to reply to this topic.