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Date Posted: 09:07:07 03/06/02 Wed
Author: Dr. D.
Subject: An annuity is the difference of 2 perpetuities
In reply to: Tim Thurber 's message, "Problem 8.8 Page 222" on 15:53:52 03/05/02 Tue

Here's a hint: set up three time lines (one beneath the other) with the years "lining up" (i.e. year one in one time line is beneath year on in the other, and so on).

Start a perpetuity at t=1 on the top time line (i.e. the first cash flow is received at t=1) and at t=5 on the second (first CF received at t=5).

In the third time line, make the cash flow for each year equal to the cash flow for that year in the first time line less the CF for that year in the second time line.

you should then have a 4 period ordinary annuity.


>Dr. DaDalt,
>
>In Chapter 8, I understood the example with the table;
>however, I'm unable to understand how to use it to
>solve problem 8.8. Could you point me in the right
>direction?
>
>Thanks,
>
>Tim Thurber

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