Question

Peter Pan is moving from Never Never land to Oz. In Oz, he will receive 35,000 dollars per year in perpetuity. He received 25,000 per year in Never Never Land and attached a value of 150,000 to being close to Tinker Bell. Determine if the following statement is either True or False Peter’s discount rate could be either 4%, 5%, or 8%

Answer 1

Answer: True

Explanation:

At 4%

PV = 35,000/4% = 875000

At 5%

PV = 35000/5% = 70000

At 8%

PV = 35000/8% = 437500

At various rates r we can see that the value is greater than what Peter Pan receives in Never Never Land which is $25,000 + $150,000 = $175,000