Question

Mary is going to receive a 34-year annuity of $9,900. Nancy is going to receive a perpetuity of $9,900. If the appropriate interest rate is 12 percent, how much more is Nancy’s cash flow worth? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

By $297 Nancy cash flow are more worthy in present value terms.

Explanation:

Marry

APV = C x [ ( 1 - ( 1 + i )^-n ) / i ]

C = Monthly payment = $9,900

Interest rate = i = 12% = 0.12

n = number of years = 34 years

APV = $9,900 x [ ( 1 - ( 1 + 0.12 )^-34)/0.08 ]

APV = $800 x 11.2578

APV = $82,203

Nancy

PV of perpetuity = Cash flow / Interest rate = $9,900 / 0.12 = $82,500

Difference = $82,500 - $82,203 = $297

By $297 Nancy cash flow are more worthy.