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Sir can u pls explain me this question:
What is the the present value of $2000 per annum, first receivable in 3 yrs time and thereafter each yr for a total of 8 yrs with interest at 5% per annum?
I think what we should do is first calculate the PV of the 2000 usd
So we should take 2000 x 6.463 which equals 12,926 dollars.
Then discount them over a period of 2 years which should be 11,724 dollars.
alighere: Please don’t answer in this forum, because it is the Ask the Tutor Forum.
Dansindo:
You can get the same answer in two ways:
Because the first receipt is in 3 year time, and there are 8 receipts, it means the last receipt is in 10 years time.
So you can take the 10 year annuity factor at 5% and subtract the 2 year annuity factor at 5%. This will give you the factor for 3 to 10 and you can apply this to the 2,000 per year.The alternative is that you can multiply the 2,000 by the 8 year annuity factor at 5% by the 2 year ordinary discount factor at 5%.
Both methods will give the same answer (there might be a tiny difference because of rounding in the tables, but this is not relevant for the exam), so use whichever way you find easiest to remember.
This is dealt with in the free lectures on discounting – you really should watch the lectures.
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