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Mr Manaton has recently won a competition where he has the choice between receiving £5,000 now or an annual amount forever starting now (i.e. a level perpetuity starting immediately). The interest rate is 8% per annum.
What would be the value of the annual perpetuity to the nearest £?
A £370
B £500
C £400
D £620I can’t see anything in the notes other than calculating the present value of a perpetuity using A/r. How would you work out the value of the annual perpetuity here assuming a question like this is still examinable? [The answer is A but how to get there?]
Have you watched the free lectures (because there is no point in using lecture notes without the lectures – if you are not watching the lectures then you need to buy a Study Text from one of the ACCA approved publishers and study from there).
If the annual amount is X, then the PV of the immediate receipt is X and the PV of the receipts from 1 to infinity is X/0.08 = 12.5X.
Therefore the total PV = 13.5X which is of course equal to 5,000.
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