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Hi,
In the question Degnis, 5b when calculating the PV in perpetuity, why do they then multiply it by the 0.659 (pv rate at year 4. It’s doing a pv of a pv? I know that when calculating pv not at t1 there’s usually this method. I don’t understand it.
Please could you help.
Thank you
Using 1/r to discount a perpetuity gives the PV at time 0 when the first flow is in 1 years time.
Here, the first flow is in 5 years time (which is 4 years later) and so multiplying by 1/r gives a PV 4 years later as well – i.e. at time 4 instead of time 0. Therefore we have to discount the answer for 4 years to get a PV ‘now’ i.e. at time 0.
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