Considering that the normal perpetuity starts paying at year 1, shouldn’t we say that the delay is 2 years? I mean, the calculation comes up to the same. I just wanted to point out the confusion with the wordings
Hi K J. I understand your point. However, if I had done it the way you are suggesting and said "this perpetuity is delayed by 2 years", but then showed the first cash flow occurring after 3 years, that may have caused confusion of its own. That said, you are absolutely right. I appreciate that comment and will keep that in mind for future videos.
please continue to make more videos! Words can't describe how grateful am I after understanding this concept as I have been kept thinking about these questions but can't figure it out.
I’ll make a video on this my friend. But first convert the APR into the three year “effective rate” by doing (1+r)^3-1. Now you have a three year rate, which maps the periodicity of your cash flows. So make a new time line in which each time period represents a three year period on the original time line. In the example that you have given, this would mean that you would get $110,000 starting in “period” 2 (6 years on the original time line). You can determine the PV using delayed perpetuity formula (the subject of this video). This will completely not solve your problem because the PV you will get from this will be at the end of Year 1 on your original time line. But that’s a simple discounting exercise - just discount that number back one year using your ORIGINAL APR. lot of info here but hope you see the logic. Will make video on this too. Thanks for asking.
Hi Joe. No, that perpetuity would be worth more. In fact, we call such a perpetuity a perpetuity DUE. Here is a video that explains the PV of that perpetuity: ua-cam.com/video/JK5-CB69FHk/v-deo.html Feel free to reach out if you need additional clarification.
Very helpful thank you. Just wanted to know why we couldn't just start the perpetuity at year 3 using the PMT/r formula? then take your answer and discount it 3 years back. This is how i have it in my example. But in my case the perpetuity was paid 2 years from today. So basically they still used the perpetuity formula
Hello Ayesha - So the PMT/r formula to value a perpetuity ONLY works if the first payment that you are getting is ONE YEAR FROM TODAY (i.e. the present). Put differently, if you had started your hypothetical time line at Year 3 (instead of Year 2, as I did), then the first payment would be occurring at Year 3 as WELL, which means that you could NOT have applied PMT/r formula to value it [In fact, the correct formula would have been PMT [(1+r)/r] : For more details check out my Present Value of Perpetuity Due Video: ua-cam.com/video/JK5-CB69FHk/v-deo.html]. ALWAYS REMEMBER: PMT/r can ONLY be used when the first cash flow of the perpetuity is starting one time period from today.
Aisha FYI I have recently confounded a platform, www.SimpliTaught.com. It contains a lot of useful videos mapped to specific business textbooks. Check it out, you may find it useful.
Hi Eda. That wouldn’t be a perpetuity then, and you would t be able to use this formula. In a perpetuity, the cash flow has to be the SAME every time period. If cash flows are not the same then you would have to discount all cash flows individually. Advance mathematical techniques can be used too, but that’s beyond the scope.
@@professorikram Thank you! My lecturer asked us a question. In that question in year 1 2 and 3 cash flows are 850, in year 5, 6 and 7 cash flows are 500 in year 8 it is 850 and in year 9 it is 700. Starting in year 10 to infinity there are 500 cash flows. Can't i use perpuity like your example and then add previous cash flow to it ?
HI Greg. Great question. You subtract the initial investment when, well, there IS an initial investment. The number that you would get in that case would be NET present value, i.e. present value that is NET of the initial investment. In this example, if your uncle had additionally said, "You can purchase this perpetuity from me for $1,000", then the NET present value of this purchase (or investment) would have been $11,557 - $1,000 = $10,557. Is it a "good" investment? Yes, of course. Because it is literally like someone asking you "Would you give $1,000 today, if I gave you $11,557 back TODAY [Remember, $11,557 is PRESENT value]". Your answer to that would be .... HELLS YEAH, right? Which is why, whenever NET present value > 0, the BENEFIT is > COST, and therefore all positive NPV > 0 investments are considered "good" investments. Hope this helped! Feel free to ask more questions. Cheers!
This is just awesome
Simplicity level infinity
Awesomeness level infinity
Respect for you sir infinity
🔥🔥
Thank you so much.. God bless you... We want more of this.. This is helping with my FM exams
Thank you for making me understand this topic. More power!
I love your videos Prof Ikram.
You have seriously helped me. Thank you so much.
I pray you have good things happen to you.
Thank you for the explanation. Amazing!
You just gained another subscriber 😎 I love the simplicity in which you teach these usually over complicated topics.
Thank you Sir.
Awesome explanation, thank you so much!
is the calculation the same if the question changed to "you will get the first $500 that begins at the end of year 3" ?
Best teacher on here
Considering that the normal perpetuity starts paying at year 1, shouldn’t we say that the delay is 2 years? I mean, the calculation comes up to the same. I just wanted to point out the confusion with the wordings
Hi K J. I understand your point. However, if I had done it the way you are suggesting and said "this perpetuity is delayed by 2 years", but then showed the first cash flow occurring after 3 years, that may have caused confusion of its own.
That said, you are absolutely right. I appreciate that comment and will keep that in mind for future videos.
please continue to make more videos! Words can't describe how grateful am I after understanding this concept as I have been kept thinking about these questions but can't figure it out.
Thanks. You are a great teacher. Strong work. People like you are the future of education
Very well explained sir
YOUR AMAZING!! I'm now subscribing
What if the amount pays $11000 every 3 years starting 7 years form today, then how to solve?
I’ll make a video on this my friend. But first convert the APR into the three year “effective rate” by doing (1+r)^3-1. Now you have a three year rate, which maps the periodicity of your cash flows. So make a new time line in which each time period represents a three year period on the original time line.
In the example that you have given, this would mean that you would get $110,000 starting in “period” 2 (6 years on the original time line). You can determine the PV using delayed perpetuity formula (the subject of this video).
This will completely not solve your problem because the PV you will get from this will be at the end of Year 1 on your original time line. But that’s a simple discounting exercise - just discount that number back one year using your ORIGINAL APR.
lot of info here but hope you see the logic. Will make video on this too. Thanks for asking.
hello sir, i don't understand 1.04 came about? can you please explain it
Sure. Interest rate is 4% which is 0.04. So (1+0.04) gives you 1.04.
Thank you I finally understand it!!
omg u are the best ever Please keep making more videos
Uff that's was so helpful
Gad to hear it Asif!
God damit
your content are clear as ozone Hole
you save me sir, salute.
Thank you so much, really great!
So does the present value of a perpetuity starting in one year have the same value as one starting today?
Hi Joe. No, that perpetuity would be worth more. In fact, we call such a perpetuity a perpetuity DUE. Here is a video that explains the PV of that perpetuity: ua-cam.com/video/JK5-CB69FHk/v-deo.html
Feel free to reach out if you need additional clarification.
Thank you so much for making this video!
June Ong You bet! More coming soon.
how to calculate the NPV if not given the discount rate ?
You can’t calculate NPV without a discount rate. If not given, you need to estimate it.
Just amazing.
Very helpful thank you. Just wanted to know why we couldn't just start the perpetuity at year 3 using the PMT/r formula? then take your answer and discount it 3 years back. This is how i have it in my example. But in my case the perpetuity was paid 2 years from today. So basically they still used the perpetuity formula
Hello Ayesha - So the PMT/r formula to value a perpetuity ONLY works if the first payment that you are getting is ONE YEAR FROM TODAY (i.e. the present). Put differently, if you had started your hypothetical time line at Year 3 (instead of Year 2, as I did), then the first payment would be occurring at Year 3 as WELL, which means that you could NOT have applied PMT/r formula to value it [In fact, the correct formula would have been PMT [(1+r)/r] : For more details check out my Present Value of Perpetuity Due Video: ua-cam.com/video/JK5-CB69FHk/v-deo.html].
ALWAYS REMEMBER: PMT/r can ONLY be used when the first cash flow of the perpetuity is starting one time period from today.
Thank you so much!!! Please keep making more videos, really appreciate it!@@professorikram
Aisha FYI I have recently confounded a platform, www.SimpliTaught.com. It contains a lot of useful videos mapped to specific business textbooks. Check it out, you may find it useful.
Thank you, sir!😁😁 @@professorikram
what software is this ? ty
cheeers!
Thank you !
Thanks
If in delayed years, i mean in year 1 and 2, i have a cash flows for example 200 for year 1 300 for year 2, what will i do?
Hi Eda. That wouldn’t be a perpetuity then, and you would t be able to use this formula. In a perpetuity, the cash flow has to be the SAME every time period. If cash flows are not the same then you would have to discount all cash flows individually. Advance mathematical techniques can be used too, but that’s beyond the scope.
@@professorikram Thank you! My lecturer asked us a question. In that question in year 1 2 and 3 cash flows are 850, in year 5, 6 and 7 cash flows are 500 in year 8 it is 850 and in year 9 it is 700. Starting in year 10 to infinity there are 500 cash flows. Can't i use perpuity like your example and then add previous cash flow to it ?
when do you deduct the initial investment?
HI Greg. Great question. You subtract the initial investment when, well, there IS an initial investment. The number that you would get in that case would be NET present value, i.e. present value that is NET of the initial investment.
In this example, if your uncle had additionally said, "You can purchase this perpetuity from me for $1,000", then the NET present value of this purchase (or investment) would have been $11,557 - $1,000 = $10,557. Is it a "good" investment? Yes, of course. Because it is literally like someone asking you "Would you give $1,000 today, if I gave you $11,557 back TODAY [Remember, $11,557 is PRESENT value]". Your answer to that would be .... HELLS YEAH, right?
Which is why, whenever NET present value > 0, the BENEFIT is > COST, and therefore all positive NPV > 0 investments are considered "good" investments.
Hope this helped! Feel free to ask more questions. Cheers!
You must be a really good teacher.
@@professorikram your answer could not be more comprehensible. Thank you from Vietnam.
@@HieuNGuyen-mb1dcwe are bless to have found him
@@professorikramthank you for your generosity and time spent explaining this to us all
I dont understand how the 1.04 came about