ACCA FM · Chapter 6 · Question 8 of 10
An investment will generate $50,000 a year in perpetuity, with the first receipt at the end of year 3. The discount rate is 10%. What is the present value of the receipts (to the nearest $)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) $413,223
Explanation
The perpetuity formula values the stream one year before the first receipt, i.e. at the end of year 2: 50,000 / 0.10 = 500,000. Discounting back two years: 500,000 / 1.10^2 = $413,223 (nearest $). Discounting for three years ($375,657) is a common error, because the formula already places the value at time 2.
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