perpetuity of 20000 in arrears. 30% tax after the end of year. cost of capital 10 %.I calculated it like this. 20000*(10-0.909)= 181820
tax; 20000*30%*(10-0.909). My problem is with calculation of the pv of perpetuity. In this answer it has been calculated simply like this; 20000*10=200000. If Perpetuity is received in arrears, shouldn't we account for that ?
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perpuity and tax
5y ago#1The fact that it is in arrears means that the first 20,000 is at the end of the first year, which is time 1.
The discount factor for a perpetuity starting in 1 years time is 1/r where r is the rate of interest.
Your treatment of the tax is correct because the tax flow starts in 2 years time.
I suggest that you watch my free lectures on investment appraisal (and if needed the investment appraisal lectures for Paper MA (was F2), because this is revision from Paper MA).
ok Thanks !
5y ago#3You are welcome :-)
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