The question is:
A beneficiary will receive AUD 1,000 per year cash flows for 10 years from an ordinary annuity. The first cash flow is expected at the end of Year 8, and the discount rate is 10%. Today’s worth of this annuity is closest to? Answer is: 3,153
Ok, so the calculation goes:
PV of 10years of annuities of 1,000 at 10% is for calculator: N=10, i/y = 10%, 1000 = PMT, 0=FV, and PV is = 6,144.57
(here is problem), the second PV calculation: FV is = 6,114.57, i/y = 10%, PMT = 0, and N needs to be =7, to arrive at correct answer of PV = 3,153
When I did this for the first time in the 2) part of the calculation I instinctively put N=8. If the CF is at the end of Y8, I assume there are 8 years for discounting. I’m having a bit of trouble to understand this, why I need to use N=7 if it is at the end of year 8?
And, if the original question was “at the beginning of year 8”, would I then need to use N=6 in the second part of my calculation?
Thank you in advance, I would like to understand this better and not just memorize what I need to use in calculation!