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Investment appraisal – Discounted cash flow techniques

4.3 Advanced and delayed annuities and perpetuities

The use of an annuity factor or perpetuity factor comes with the assumption that the
series of cash flows starts at t1

 If instead the cash flow starts at t0 this is known as an advanced annuity or
perpetuity.

Ignore the t0 cash flow completely and add one to the discount factor (for the
remaining cash flows) before multiplying by the cash flow value.

 If instead the cash flow starts at a time period later than t1 this is known as a
delayed annuity or perpetuity.

Apply the appropriate annuity / perpetuity factor to the cash flows as usual.
This will discount the series of cash flows to a single figure as at one time
period before the cash flows started.

Then discount the single cash flow back to t0 using the appropriate discount
factor.

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