Answer:
(A) A perpetuity is a stream of regularly timed, equal cash flows that continues forever
(B) The value of a perpetuity is equal to the sum of the present value of its expected future cash flows
the bank offers 1.6%
in the alternative scenario it offers 1.067%
Explanation:
(A) A perpetuity is a stream of regularly timed, equal cash flows that continues forever
The perpetuity is an annuity in which time tends to infinity, to be qualified as an annuity the cash payment must be regular.
(B) The value of a perpetuity is equal to the sum of the present value of its expected future cash flows
As state above the perpetuinty is an annuity, the annuities return the present value of the expcted future cash flow.
Given the annuity formula
if times tends to infinity then the expression:
Nexti n the annuity formula we got:
So we end up with C / rate = PV
which s the perpetuity formula
800/50000 = 0.016 = 1.6%
800/75000 = 0.0106667 = 1.067%
