Hello
The correct answer here suggests that we need to discount over 3 years and not 4 like how I answered. Can someone please explain to me why? tried to draw a timeline, it just didn’t make sense.
Thanks
The formula:
PV = \frac{Pmt}{r}
gives the present value of an ordinary perpetuity; i.e., a perpetuity that makes payments at the end of each period. Therefore, the present value will be as of one period before the first payment.
You can remember the perpetuity formula as Bill shows above, or you can just do a simple summation formula, being careful with the timing of the payments. Because it doesn’t say otherwise, it’s assumed that payments are annual starting at t = 4.
Here’s the calculations:
2 Likes
Hi,
Always try to write formula with the years.
PV(yr 0) = Cash flow year 1 / r
Note the PV is always the year before so if the cash flow is at year 4
PV(yr 3) = Cash flow year 4 / r
So once you have used the perpetuity forumla you need to discount 3 years.
The proof comes from infite series calculations in maths. Maybe be wait to after exam day to work through the proof.
You could also use the CF worksheet to approximate the PV:
CF0 =0 C01=0 F01=3 C03 = 1000 F03 = 9,999
2nd quit
NPV
I=10
CPT NPV = 7513.148009