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I am trying to calculate the PV of a perpetuity of $6000 starting at t2. Discount factor is 10%.
My method is $6000*10*0.909=$54540The solution given is $6000*9.091=$54546
There is a difference of $6 but I think my method is correct. I cant find my answer from the answers given. I have understood that in the answer they subtracted one year pv factor (0.909) from a pv of a perpetuity (10) to get 9.091. Could be the difference due to rounding or my method is wrong. if the difference is due to rounding, which method do you recommend. if it was not a mcq question I was not going to be worried, but now I cant find my answer due to $6 difference.
It is purely due to rounding in the tables – either approach is valid.
The difference is irrelevant in the exam because generally we work to the nearest $1,000, and in Section C of the exam (the long questions) the marks are for the workings anyway and not for the final answer.
(It is not only exams – in real life nobody would be worried about $6 difference 🙂 )
thank you Sir. in the long questions, am i penalised if i use 1/1.1 which is exact instead of 0.909 which is rounded. that way i can avoid typing errors when copying discount factors from the tables and its also faster.
thank you for the great work Sir
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