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Hello,
I have a question
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 8%?
Thank you
In future, if you want me to answer, then you must ask in the Ask the Tutor Forum – this forum is for students to help each other.
There are two ways of doing this – both of which obviously give the same answer.
The most efficient way is to use the perpetuity factor of 1/r, and then discount the answer for 2 years because the perpetuity is starting 2 years late (it is starting at time 3 instead of time 1).
I go through examples of this in my free lectures. The lectures are a compete free course for Paper MA (F2) and cover everything needed to be able to pass the exam well.
Thank you so much for replying.
I’m so sorry I’ve accidentally posted here. Actually I’m an old user but maybe because I was rushing I might have posted it here.I’ll make sure that I won’t do this again (actually because this is twice that I did this).
Sir actually I am still having difficulty solving the problem. Could you kindly help me with this please? Sir, if you’ll allow I can post this back in Ask the Tutor Forum.
And I’ve started watching your lecture videos. And I must say that I highly appreciate what you have done for us. It’s invaluable that too with high quality information.
Thank you for helping students like us and it’s an honor to learn from you Sir. Both ACCA and to be a kind person in life. Actually you’ve in some way been a role model in teaching students how to be selfless at the same time. Thank you for everything and I’m sorry for writing that long.Thank you
You will have to say what difficulty you are still having.
As I wrote before, you multiply by the discount factor for a perpetuity (1/0.08) and then multiply by the 2 year discount factor at 8% from the tables.
Sir when I solving I calculated it something like this,
$18,750 × 0.794 = $14,887.50
Because I had the impression that if it started from Year 3 then it probably should have been discounted with the 3rd year discount rate at 8% but the answer discounted it for 2 years. I am still confused as to how this was discounted for 2 years.
Sir I would be grateful if you could kindly help me in detail because that might be kind of easy for me to grab what is being asked.
Thank you.
I wrote in my first reply exactly why we discount for 2 years and not for 3 years!!
You must watch my free lectures on interest and on discounting because I explain this in the lectures also, with examples, because it is a common problem in the exam. You cannot expect me to type out my lectures here 🙂
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