Question

A perpetuity will pay $300 per year, starting five years after the perpetuity is purchased. is purchased. What is the present value of this perpetuity on the date that it is purchased, given that the interest rate is 3%?

Answer 1

Answer:

present value of perpetuity = $29615.93

Explanation:

given data

pay = $300 per year

interest rate = 3%

solution

we get here present value payment after 5 year is

present value = $\frac{future\ value}{1+ discount\ rate }$ ...........1

present value = $\frac{1000}{(1+0.03)^5}$

present value = $862.60

and

now we get present value on purchase date

present value = $\frac{payment}{interest\ rate}$   ......2

present value = $\frac{862.60}{0.03}$

present value = $28753.33

and

present value of perpetuity is

present value of perpetuity =  $862.60 + $28753.33

present value of perpetuity = $29615.93