Perpetuity

It is me who teaches F9 - not Mike :-) Two things: Firstly, something has gone wrong with your arithmetic. 100,000 x 1/0.14 = 714,300, that is correct. However, 100,000 x 0.877 = 87,700 (not 877,000 :-) ) This would give an PV of 626,600 and an NPV of 126,600. (The alternative approach is to take the 714300 (which is the PV of a perpetuity starting in 1 years time, but then to multiply by the 1 year factor to account for the fact that it starts 1 year late. 714,300 x 0.877 = 626,441. The difference is purely the rounding of the discount factors and is irrelevant - you can do it whichever way you find more easy) Secondly, are you sure you have typed the question exactly as it was written? If the first cash flow is at time 2 (i.e. in 2 years time) then what you have done is correct (apart from your arithmetic mistake), and the solution is wrong. If, on the other hand, the wording is just slightly different (such as, for example, cash flows are 100,000 after the second year) then it would mean that the first cash flow would be in 3 years time which would make the solution correct. However they have not subtracted the 2 year factor - they have multiplied by it because they are taking the perpetuity back 2 years because it starts 2 years late. The alternative would have been two subtract the 2 year annuity discount factor which would give the same answer.

Of course you teach F9 Sir John! :-) :-) I do apologise...I have no idea how I confused myself!! Although I did not copy the question word to word, what I have mentioned is as per the question. I will have to re-do the question and see if I still read the same way! Thank you for your help Sir John :-) Regards

You are welcome :-)