Residual Income.. last cash flow

Can someone please help explain their thoughts/thinking process on the last CF for Continuing RI?

In the example, it says that after 4 years RI = 0.

And in all the formulas, i see the T - 1…

In the example, they take the RI fromyear 3 and add it to the discounted (1+r - w) RI from year 4. Completely removing year 4.

Any method to remembering this?

Thank you.


Your calculator cannot discount a cash flow by dividing it by (1+r-w), it uses (1+r)^n. That is why schweser eliminate the last period when entering RIs in the financial calculator… For any case that has “w” does not =0, you have to manually discount the last cash flow for one period, to get the present value discounted one period back… Accordingly, you add it to RI in year (t-1) and not (t=t)… You enter RIs for prior periods normally and let your calculator handle the rest of discounting (to year t=0).