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Please help with this question:
Mr Manaton has recentrly won a competition where he has the choice between receiving $5,000 now or an annual amount forever starting now (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. $620Why the answer is A?
Yes, pleeeease explain! 🙂
I don’t understand this example…
And I don’t understand your math: 5000 / 8% = 62 500 and 400 / 8% = 5000
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@sangria9 said:
Yes, pleeeease explain! 🙂
I don’t understand this example…
And I don’t understand your math: 5000 / 8% = 62 500 and 400 / 8% = 5000ok
Present value of a perpetuty formula is :
PV= cashflow / rate of interest
PV= cash flow * 1/rate of interest so..1/rate is perp… factor
Assumption: This is the prep… starting in 1 year time..
As per your question it is starting now! so we add one factor year to this..
now ..
Step 1: 1/.08=12.5
Step 2: Add 1 ….12.5+1=13.5
Step 3: cal……5000/13.5=370 approxHere PV is given as 5000..so we rearrange the formula…to PV/Factor as we are looking for a cash flow..
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