Mo will receive a perpetuity of $32,000 per year forever, while Curly will receive the same annual payment for the next 40 years

Question

3 years ago

4

. If the interest rate is 7.6 percent, how much more are Mo's payments worth?

1 answer:

anygoal [31] · Answer 1 · 2022-05-11T13:15:22+03:00

Answer:

Mo payment is worth more than Curly by $22,482.55

Explanation:

To determine the the amount by which Mo's payment is worth more than the Curly, find the difference between their present value of their payments.

Mo

The present value (PV) of a perpetuity is determined as follows;

PV of perpetuity = A/r

A- annual payment - 32,000,r- 7.6%

PV = 32,000/0.076 = 421,052.63

Curly

PV of an annuity is given as follows:

PV =A× ( 1-(1+r)^(-n))/r

n- number of years -40, r-7.6%, A-annual payment- 32,000

PV = 32,000× (1- (1.076)^(-40))/0.076

PV = $398,570.08

Mo payment is worth more than Curly by the

Difference = $421,052.63 - $398,570.08 = 22,482.55

Mo payment is worth more than Curly by 22,482.55