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A perpetual annuity returns $8250 per annum at 8% annual compounded interest rate.
Calculate intial investment if NPV is $3125?
There is no point in simply setting me test questions and expecting me to provide an answer.
You must have an answer in the same book in which you found the question, so ask about whatever it is in the answer that you are not clear about – then I will explain.
Have you watched my free lectures? Everything needed to be able to answer this question is explained in the lectures – they are a complete free course for Paper MA (F2) and cover everything needed to be able to pass the exam well.
If I divide
8250÷8%=103125
Now that is inflow right??
Npv is 3125
So 103125+3125=106250
But the right answer is 125000
I have watched all your free lectures ..
Either you have not copied out all of the question correctly, or there is a mistake in the answer in your book.
On what you have typed, the PV of the returns is 8,250/0.08 = 103,125.
Since the NPV is +3,125, the initial investment is 103,125 – 3,125 = 100,000.