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PERPETUITY AND ANNUNITY

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › PERPETUITY AND ANNUNITY

  • This topic has 1 reply, 2 voices, and was last updated 3 years ago by John Moffat.
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  • March 2, 2022 at 7:31 pm #649684
    shaunak22
    Participant
    • Topics: 220
    • Replies: 41
    • ☆☆☆

    SIR in lot of perpetuity and annuity they say receive annuity and perpetuiry starting in 3 years time but still when we discount it we use 2 years discount factos why is that ?

    DOUBT – should we always assume that if the annunity or perperutiy starts in 3 year then always subtract 1 and use that discount factor for calculations ?

    March 3, 2022 at 7:30 am #649701
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    The annuity factors apply to a flow stating in 1 years time. If it starts in 3 years time then that is 2 years later and so using the factor will give a PV 2 years later as well. So the result then needs discounting for a further 2 years. Same for perpetuities.

    There is no logic at all in simply subtracting 1 from the discount factor.

    I suggest that you watch the Paper MA lectures on investment appraisal because this is revision from Paper MA.

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