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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 ?
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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