Page 49 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Investment appraisal – Discounted cash flow techniques

Question 7

Annuities

A payment of $5,800 is to be made every year for 15 years, the first payment
occurring in one year’s time. The interest rate is 12%. Calculate the PV of the
annuity:

(a) Using the annuity factor formula

(b) Using the annuity factor tables

(a)
-n
1− (1 + r)
Annuity factor = ————————
r
-15
Annuity factor = (1 – 1.12 )/0.12 = 6.810864489
PV = $5,800 × 6.810864489 = $39,503

(b) from tables, annuity factor for 12% and 15 years is 6.811

PV = $5,800 × 6.811 = $39,504

Illustrations and further practice

Now try TYU questions 6 and 7 from Chapter 3

41