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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
To 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.
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