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Cilla has a perpetuity that is due to start in two years’ time. If she received the money in a lump sum now, it would be worth $300,000.
The interest rate is 17%.How much will Cilla receive each year?
Please do not simply set test questions and expect to be provided with a full answer. You must have an answer in the same book in which you found the question, so in future ask about whatever it is in the answer that you are not clear about and then I will explain.
The discount factor for a perpetuity starting in 2 years time is 1/0.17 x 1/1.17 = 5.0277 (this is explained in my free lectures on discounting).
If the receipt each year is X, then X x 5.0277 = 300,000.
Therefore X = 300,000 / 5.0277 = 59,699 per year.
Thanks for your response but sir the answer was not there. I was giving a mock exam and it was just showing that the answer i entered is incorrect it wasn’t showing me the answer. But thanks a tonn for you response.
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