september 2006 - continuous payments

[johnpe21]

Hi. I am a bit confused with the present values of continuous payments. I solved question 2 by firstly calculating the pv and then accumulated it for 3 years. For this question , for the present value I took (4+6u+8u^2).

I tried to do the same in question 10 of the same paper. But in the solutions, for the first payment, for example for the cost to companies, he takes for the first year 50U and not 50 as the pv of the first payment.

COuld you please explain why is it the case? I cant see the difference, as for both questions it says "a rate of .. in the first year"

Thanks a lot

 

[John Lee]

Hi. I am a bit confused with the present values of continuous payments. I solved question 2 by firstly calculating the pv and then accumulated it for 3 years. For this question , for the present value I took (4+6u+8u^2).

What is u? Is that v (the discount factor)? And you're missing the continuous level annuity.

Would be correct if the expression was multiplied by a one year level continuous annuity.

I tried to do the same in question 10 of the same paper. But in the solutions, for the first payment, for example for the cost to companies, he takes for the first year 50U and not 50 as the pv of the first payment.

Yeah - that's why we produce the ASET. The examiners have written this in an unusual way.

A one-year level continuous annuity is (1-v)/δ. But 1-v = iv. Hence they have written it as i/δ × v.

So it is the same - it's just the way that it has been written.