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An investment will produce an annual return of $1,500 in perpetuity with the first receipt starting in
3 years’ time.What is the present value of this perpetuity discounted at 6%?
A $21,000
B $22,250
C $25,000
D $25,250The answer is (B) but I’m not sure how. Apparently it has to be divided by 0.06 and multiplied by 0.890 which is the 2 year discount rate thing. Is it possible if you could explain why this happens? Thanks in advance sir ! Expecting a reply asap as I have the exam tomorrow hopefully
The discount factor for a perpetuity is 1/r, and so in this case 1/0.06
However this gives the PV assuming that the first receipt is in 1 years time. Here, the first receipt is in 3 years time, which is two years later than in 1 years time, so the answer then needs discounting for 2 years at 6%.
This is all explained in my free lectures. The lectures are a complete free course and cover everything needed to be able to pass the exam well.
ooh I got it now ! Thanks a lot John ! And yea i have been through all of the lectures and notes , i guess i kinda forgot it a lil bit. Hopefully the exam goes well tmrw. Thanks once again for your great videos and explanations + clearing the doubts of all students, we really do appreciate your great work ! <3
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