Question

A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 4%?

Answer 1

Answer:

$21,370.1071

Explanation:

The computation of the present value of this perpetuity is shown below:

= The present value after five years + present value on the date of purchase

where,

The present value after five years is

= ($1,000) ÷ (1.04)^5

= $821.9271

And, the present value on the date of purchase is

=  $821.9271 ÷ 4%

= $20,548.18

Hence, the present value of the perpetuity is

= $821,.9271 + $20,548.18

= $21,370.1071