Answer to Question #283553 in Finance for marcsi7a

Question

 

 Homework Assignment:  

Determine the present value of each perpetuity 

Perpetuity 

Annual Amount 

Discount rate 

A 

$20,000 

8% 

B 

100,000 

10 

C 

3,000 

6 

D 

60,000 

5 

Answer 1

Formula to calculate present value of perpetuity is:

$PV=\frac{CF}{r}$

Where;

PV = present value

CF = annual cash flow

r = discount rate

$PV(A)=\frac{20,000}{0.08}=\$250,000$

$PV(B)=\frac{100,000}{0.10}=\$1,000,000$

$PV(C)=\frac{3,000}{0.06}=\$50,000$

$PV(D)=\frac{60,000}{0.05}=\$1,200,000$