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PV in perpetuity is calculated by amount/r but in the quiz solution why was it given
Amount+amount/r?To get the PV of a perpetuity we multiple by 1/r. However this gives the PV for a perpetuity where the first flow is in 1 years time.
Although you do not say which quiz question you are referring to, I assume that the question says that the first flow is immediately. The PV of a flow at time zero is the amount of the flow.
So the total PV is the amount of the flow + the PV of the flows from time 1 onwards.If you are still unsure then do watch the free Paper MA lectures on investment appraisal, because this is revision from Paper MA.
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