Present Value of a Delayed Perpetuity

Рет қаралды 36,557

5 жыл бұрын

This video explain an EXTREMELY IMPORTANT calculation that many students find confusing. The present value of "ordinary" perpetuity formula (PV = C/r) can only be used when the FIRST cash flow is occurring one time-period into the future.
However, there can be instances where the perpetuity is "delayed", i.e. the first cash flow occurs MORE than one year into the future (You will see applications of this in more advance finance classes). In such cases, the PV = C/r "ordinary" perpetuity formula needs to be augmented. In this video, I explain how (using an example).
ABOUT ME:
My name is Atif Ikram. I am a member of the finance faculty at Arizona State University's W.P. Carey School of Business (wpcarey.asu.edu/people/profil.... I love to teach! Over the past few years, I have taught a variety of economics and finance courses to undergraduate and graduate students at Rutgers University, Wayne State University, and Lahore University of Management Sciences (LUMS, Pakistan). Presently I teach advance corporate finance courses at ASU.
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Пікірлер: 53

@ChetanRanjanEd-Wise 2 жыл бұрын

This is just awesome Simplicity level infinity Awesomeness level infinity Respect for you sir infinity 🔥🔥

@TheHDPerson 9 ай бұрын

I love your videos Prof Ikram. You have seriously helped me. Thank you so much. I pray you have good things happen to you.

@manuelchamp7154 3 жыл бұрын

Thank you so much.. God bless you... We want more of this.. This is helping with my FM exams

@thatwasinteresting3319 3 жыл бұрын

Thanks. You are a great teacher. Strong work. People like you are the future of education

@xrlim9135 2 жыл бұрын

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.

@khenkhen08 3 жыл бұрын

Thank you for making me understand this topic. More power!

@iraismorales9016 2 жыл бұрын

You just gained another subscriber 😎 I love the simplicity in which you teach these usually over complicated topics.

@temiolatunji8730 2 жыл бұрын

Thank you for the explanation. Amazing!

@benlevy3339 2 жыл бұрын

Awesome explanation, thank you so much!

@xkidmidnightx 4 жыл бұрын

Best teacher on here

@gajendrakc813 Жыл бұрын

Thank you Sir.

@Abdullah97484 4 жыл бұрын

YOUR AMAZING!! I'm now subscribing

@amashmlk7543 4 жыл бұрын

Very well explained sir

@hamishmcainsh7835 3 жыл бұрын

Thank you so much, really great!

@oshinsharma7398 4 жыл бұрын

Just amazing.

@alxlscn6036 2 жыл бұрын

Thank you I finally understand it!!

@claireong8663 4 жыл бұрын

Thank you so much for making this video!

@professorikram 4 жыл бұрын

June Ong You bet! More coming soon.

@ebtisamalhunaidi1462 9 ай бұрын

omg u are the best ever Please keep making more videos

@quangdatan8483 2 жыл бұрын

you save me sir, salute.

@MrNachoman21 3 жыл бұрын

Thank you !

@hdqtbvh3172 3 жыл бұрын

Thanks

@tk6376 Жыл бұрын

God damit your content are clear as ozone Hole

@asifmuhammad1704 Жыл бұрын

Uff that's was so helpful

@professorikram Жыл бұрын

Gad to hear it Asif!

@kimmyc8398 2 жыл бұрын

is the calculation the same if the question changed to "you will get the first $500 that begins at the end of year 3" ?

@acoessimples8453 3 жыл бұрын

what software is this ? ty

@onetonist 4 жыл бұрын

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

@professorikram 4 жыл бұрын

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.

@A28049 3 жыл бұрын

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

@professorikram 3 жыл бұрын

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: kzfaq.info/get/bejne/gLFlYKZzm5-qeJ8.html]. ALWAYS REMEMBER: PMT/r can ONLY be used when the first cash flow of the perpetuity is starting one time period from today.

@A28049 3 жыл бұрын

Thank you so much!!! Please keep making more videos, really appreciate it!@@professorikram

@professorikram 3 жыл бұрын

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.

@A28049 3 жыл бұрын

Thank you, sir!😁😁 @@professorikram

@TheMendo123 4 жыл бұрын

So does the present value of a perpetuity starting in one year have the same value as one starting today?

@professorikram 4 жыл бұрын

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: kzfaq.info/get/bejne/gLFlYKZzm5-qeJ8.html Feel free to reach out if you need additional clarification.

@shivangikesharwani3428 3 жыл бұрын

What if the amount pays $11000 every 3 years starting 7 years form today, then how to solve?

@professorikram 3 жыл бұрын

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.

@ReymartRodriguez 9 ай бұрын

hello sir, i don't understand 1.04 came about? can you please explain it

@professorikram 9 ай бұрын

Sure. Interest rate is 4% which is 0.04. So (1+0.04) gives you 1.04.

@regnardsilanga4011 Жыл бұрын

how to calculate the NPV if not given the discount rate ?

@urduwithatif Жыл бұрын

You can’t calculate NPV without a discount rate. If not given, you need to estimate it.

@eda3165 3 жыл бұрын

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?

@professorikram 3 жыл бұрын

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.

@eda3165 3 жыл бұрын

@@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 ?

@tinal3991 3 жыл бұрын

cheeers!

@gregmcloughlin7339 4 жыл бұрын

when do you deduct the initial investment?

@professorikram 4 жыл бұрын

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!

@HieuNGuyen-mb1dc 6 ай бұрын

You must be a really good teacher.

@HieuNGuyen-mb1dc 6 ай бұрын

@@professorikram your answer could not be more comprehensible. Thank you from Vietnam.

@MrsGG-id1os 5 ай бұрын

@@HieuNGuyen-mb1dcwe are bless to have found him

@MrsGG-id1os 5 ай бұрын

@@professorikramthank you for your generosity and time spent explaining this to us all