On page 332 of book 6, exhibit 5 is given were they calculate an annuity using an adjusted rate. They have footnote where adjusted rate = (1 + discount)/(1 + growth rate) - 1
Above is if discount rate > growth.
How do we do if growth > discount rate? Exhibit 12 for Jessica’s case is when growth is > discount rate. How do I find this adjusted rate to do the annuity calculation? Thanks
Growth rate can’t be larger than discount rate. Where are they getting 1, 644,000 from?
They still used the same equation for adjutsted rate = [(1 + discount)/(1 + growth)] - 1.
With exhibit 5 footnotes, it said to only use this if discount > growth. So why did they use the same form for exhibit 12 ?
THanks
For a finite period, nothing wrong having growth > discount rate. You will have a negative adjusted rate which will inflate the PV(cashflow) when used. Over a perpetual period (aka constant growth model), then g > r would cause problems.
Adjusted rate = 1.03/1.05 - 1 = -1.9048%
Mode: BGN
-1.9048 [I/Y]
20 [N]
68,070 [PMT]
0 [FV]
[CPT] [PV] -1,644,369
Thank you! This was killing me
hi How to arrive pv when disc rate and growth rate are equal as given in exhibit 6
BGN mode
FV = 0
PMT = 33,670
I/Y = 0 (=1.03/1.03 - 1)
N = 37 (= 65 - 28)
CPT PV -1,245,790 <— Jessica’s Life Cover (from Paul’s perspective)
Many thanks. Awesome. Havent thought 0 can also be used for I/Y. With rate 0, it turns to be simple multiplication of 33670*37 to arrive at PV of 1,245,790.
Exactly.
Yeap, that’s right