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

• Author
Posts
• chen2196
Participant
• CFA Level 1
4

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
• CFA Charterholder
4

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

= Â£24,000 / 0.06 = Â£2,000 / 0.005

= Â£400,000

Hope that helps!

• chen2196
Participant
• CFA Level 1
1

Thank you very much!