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Up4
Hi I am confused on this question. Aren’t you supposed to use annual payment amount to calculate PV of perpetuity? I don’t know why the answer doesn’t use 2000*12 = 24000 as A, but instead just uses monthly payment 2000. Thank you so much for helping me!
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Up4
Hey @chen2196
You can use A = 2000*12 = 24000 as A, but your r then has to be 6% rather than 6%/12.
The answer uses monthly payments because r = 6%/12 = monthly discount rate. They can also use annual payments to calculate the same number as long as the discount rate is annual.
So PV = Annual payments / Annual discount rate = Monthly payments / Monthly discount rate
= £24,000 / 0.06 = £2,000 / 0.005
= £400,000
Hope that helps!
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Up1
Thank you very much!
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