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PV of a perpetuity

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › PV of a perpetuity

  • This topic has 3 replies, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • October 21, 2016 at 10:37 am #345341
    ematete2005
    Member
    • Topics: 22
    • Replies: 64
    • ☆☆

    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=$54540

    The 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.

    October 21, 2016 at 12:17 pm #345364
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    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 🙂 )

    October 21, 2016 at 4:42 pm #345484
    ematete2005
    Member
    • Topics: 22
    • Replies: 64
    • ☆☆

    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

    October 21, 2016 at 5:48 pm #345494
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    I have already answered that – you will not be penalised.

    However, when it comes to discounting annuities etc., then it is faster if you use the tables!

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