Sept 2000 Q12(i) versus Sept 2001 Q8

[bbjpk]

I understand all parts of the solution to each of these questions except for the parts to do with the PV of the continuous payments.

For Sept 2000 Q12(i) for the PV of the net revenue received continuously for 25 yrs with an initial rate of payment of $25000pa where the rate of payment grows continuously at a rate of 6%pa I did:
PV= 25000a-bar for 25years @ j=1.07/1.06-1 which was correct.

For Sept 2001 Q8 it says the net revenue is $200000 in the second year & thereafter is expected to grow at 3%pa compound & the revenue is received continuously throughout the year so I did:
PV=(200000/1.03)a-bar for 19 years @ j=(1+i)/1.03-1 which is wrong.

Can someone please the difference? Is it to do with the word "rate"?

Thanks!

 

[bobbathejobba]

I understand all parts of the solution to each of these questions except for the parts to do with the PV of the continuous payments.

For Sept 2000 Q12(i) for the PV of the net revenue received continuously for 25 yrs with an initial rate of payment of $25000pa where the rate of payment grows continuously at a rate of 6%pa I did:
PV= 25000a-bar for 25years @ j=1.07/1.06-1 which was correct.

For Sept 2001 Q8 it says the net revenue is $200000 in the second year & thereafter is expected to grow at 3%pa compound & the revenue is received continuously throughout the year so I did:
PV=(200000/1.03)a-bar for 19 years @ j=(1+i)/1.03-1 which is wrong.

Can someone please the difference? Is it to do with the word "rate"?

Thanks!

Hurrah another decent question - I was beginning to lost hope!

The september 2000 it grows continuously where September 2001 it is a "step-increasing" growth - so goes up 3% at start of each year and is paid at that rate for the whole year - so can't do your clever trick. Either use an Ia bar (with the bar just above the a) or go at it from first principles.

Does that help?