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I found this question in the MA tests index on the open tuition website.
What is the present value of $6000 per annum first receivable immediately, and thereafter in perpetuity, with interest of 9.5% per annum?I did the calculation as provided in the lecture for Chapter 22, using the formula that was explained (P=A/r)
$6000/0.095 = $63,158However, when I checked the answers, it was wrong and showed $69,158, which came after adding $6000 to the initial value of $63,158
Why do we have to add the $6,000 to the amount after calculating it using the perpetuity formula?
As I explain in my free lectures, multiplying by 1/r apples to a perpetuity starting in 1 years time.
In this question there is also 6,000 received at time 0, and the PV of this is 6,000, which needs adding on to the PV of the perpetuity.
I do suggest that you watch my free lectures before attempting the tests.
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