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Could anyone please explain why in BPP PR KIT Q159 (Degnis Co) in part b) we use the discount factor of 4th year while calculating the present value of cash flows in perpetuity?
The calculation looks like this: (2017000/0.11)x0.659
Why do we have to multiply it by discount factor from PV table for year 4? Is it because we calculate it from 4th year onwards? I don’t get the idea behind it.
Thanks in advance for clarification!
The discount factor for a perpetuity is 1/r, but this gives the value at time 0 is the first flow is in 1 years time.
If the first flow is (for example) in 3 years time, then this is 2 years later than in 1 years time, and so the value is also 2 years later – time 2 instead of time 0. So we then need to discount for 2 years to get to the PV now.Do watch the free Paper F2 lectures on this, because this is revision from F2.
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