Dear Sir,
An investment will produce an annual return of $ 1500 in perpetuity with the first receipt starting in 3 years' time. What is the present value of this perpetuity discounted at 8 %? What is the PV also if the perpetuity stars now?
I'm confused with both calculations. What does Present Value mean in this questions? Why i need to take the trouble to factor it to present value? Lastly this question never mentioned the investment amount.
Thank you very much
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F2 Complex Perpetuity
10y ago#1To understand what we mean by present value, you really must watch the free lecture on Interest - it is not possible to type out the whole lecture here :-)
The discount factor for a perpetuity is 1/r, where r is the rate of interest (in this case 8% or 0.08). However that is when the perpetuity starts in 1 years time.
In this question it starts in 3 years time, which is 2 years later.
So to get the present value you multiply by 1/r and then multiply by the 2 years discount factor from the tables in order to get the present value.
Thank You John
10y ago#3You are welcome :-)
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