September 2005 Q11 Can anyone please explain why for the costs of staff he used v^3 + 1.05v^4... and not v^2+1.05v^3.. aren't the costs incurred at the BEGINNING of each year? It says that they will be incurred at the beginning of each year starting in 3 years time.. so isn't the first payment sort of at the end of year 2? i.e it should be discounted by v^2 and not v^3. Thanks!
Hi Kika, The way I would have read it is (standing at t=0), one years time is t=1, etc. meaning three years time is t=3... in which case the first staff costs payment of £1m is at t=3 and you would need to multiply by v^3 to get PV at t=0. Hope that makes sense!
Yep I would agree. I think its at the start of year 4, in which case you need to discount back 3 years. Good luck for the exam!
What about finding a growth adjusted rate of interest 1 + r = (1 + i)/(1 + g) where g is the growth rate and then using an annuity in advance deferred for three years??
