Patterson’s patties is a fast-food hamburger chain with over 1,000 locations worldwide. Recently, the company has been dealing w
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Answer:
d. A perpetuity is a stream of regularly timed, equal cash flows that continues forever.
Explanation:
A perpetuity refers to a future stream of cash flows, paying a constant amount regularly till forever. Such stream is never ending.
The present value of a perpetuity is computed by dividing the constant amount receivable till forever, by required rate of return/cost of capital.
Present value of a growing perpetuity is given by
=
wherein cash flows represent cash flows receivable growing at g% rate till forever
r = required rate of return or cost of capital
g= growth rate of cash flows
Where the cash flows are of constant amount i.e non growing nature, the present value of such a perpetuity is given by,
=
Answer:
Multiplying the annual deposit and the number of years before calculating the problem.
Explanation:
An annuity can be defined as a sequence of payment that is typically made at equal intervals i.e at specific period of time.
Basically, annuity can be calculated using the compound interest formula. It is given by the mathematical expression;
Where;
A is the future value.
P is the principal or starting amount.
r is annual interest rate.
n is the number of times the interest is compounded in a year.
t is the number of years for the compound interest.
Additionally, the time period between each payment is called payment period.
The term of an annuity refers to the time from the beginning of the first payment made by an individual to the end of the last payment period.
A common error made when solving a future value of an annuity problem is multiplying the annual deposit and the number of years before calculating the problem.