CFA CFA Level 1 a practice question about perpetuity in section time value of money

a practice question about perpetuity in section time value of money

  • This topic has 2 replies, 2 voices, and was last updated Nov-20 by chen2196.
  • Author
    Posts
    • chen2196
      Participant
      Up
      4
      Down

      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!

    • Zee Tan
      Keymaster
      Up
      4
      Down

      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!

    • chen2196
      Participant
      Up
      1
      Down

      Thank you very much!

Viewing 2 reply threads
  • You must be logged in to reply to this topic.