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Good day, Sir Moffat.
I have a question regarding the F2 mock exam:
What is the present value of $2000 per annum, receivable for a total of 8 years with the first receipt being in 3 years time, with interest at 5% per annum (to the nearest $’00)?
The answer is: $11726
The solution is:
The first receipt is in 3 years time and the last receipt is in 10 years time.
The 10 year annuity discount factor at 5% = 7.722
The 2 year annuity discount factor at 5% = 1.859
So the total factor for 3 to 10 is 7.722 – 1.859 = 5.863
$2000 x 5.863 = $11726I don’t quite get the solution. Why is there a 10? It says 8 years in total? Please explain the solution in detail, I would be very thankful 🙂
Thank you in advance, God bless 😀
The first receipt is in 3 years time. The second is therefore in 4 years time, the third in 5 years time, and so on.
Since there are 8 receipts in total, the final receipt is in 10 years time.With regard to calculating the factor of 5.863, you have the workings – if you are not clear then you should watch my lectures on interest and on investment appraisal where I explain how to deal with annuities that start later than time 1.
(My lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.)
Oh okay, so instead of counting from 1, we start with 3 because that’s when we get our first receipt, am I correct?
In the second part of the solution why did we start with year 2 in getting the annuity discount factor?
Yes – we start from 3 because that is when you get the first receipt.
We don’t start with 2 in the second part! We remove the 2 year annuity from the 10 year annuity so as to be left with 3 to 10.
Again, you must watch my free lectures – you can’t expect me to type them all out here 🙂
Hi Sir,
Can you please explain how you got 5.863.
I have watched your lectures but i don’t know how to arrive at it.The workings are in the very first post. It is the 10 year annuity factor (from the tables) less the 2 year annuity factor (again from the tables).
Why do we take the annuity factor for 2 years when the first payment is received after 3 years.
I explain this in the second of my replies above!
“Yes – we start from 3 because that is when you get the first receipt.
We don’t start with 2 in the second part! We remove the 2 year annuity from the 10 year annuity so as to be left with 3 to 10.
Again, you must watch my free lectures – you can’t expect me to type them all out here ? “
No I wasn’t expecting you to type it all out, but thank you so much I understand now.
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