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What is the present value of $2,000 per annum, first receivable in 3 years time and thereafter each
year for a total of 8 years, with interest at 5% per annum (to the nearest $’00?
A $11,700
B $10,000
C $12,900
D $11,200Good evening sir
i have solved this question and i have got the answer but my concept is still not clear sir i wanted to ask hat in this question you are minusing the annuity rate of 10th year from the second year but sir i have done another question from some where else of annuities in which we were given the initial investment and annual cash flows so in that question they were multiplying the npv of future cash flows back to the commenced year with the value of present value table like if it is started in year three so to discount back to year 0 they were multiplying it to present value f yr three sir please make my concepts clear so that i may not do thee types of mistakes again
Thank you 🙂The amount are receivable from time 3 to time 10.
There are two ways of doing it,
You can use the annuity factor for 8 years multiplied by the normal discount factor for 2 years (because the flows start in 3 years time instead of 1 years time – so 2 years later)
Alternatively, you can use the 10 year annuity factor less the 2 year annuity factor (so as to leave a total factor for 3 to 10).
Both ways will give the same answer. (In fact they will be a little bit different because the tables are rounded to 3 decimal places, but that does not matter in the exam – for that reason most questions ask for an answer to the nearest thousand 🙂 )
thank you sir i got this but i wanted to ask that i have seen another question in which the return is starting from yr 6 for three years and in that question the annuity rate is been taken for the cashflows is of three year means of the third year and after that to discount back to yr 0 they are taking its present value of the same percentage and of the same year not the annuity value please explain this
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