Question

a) Calculate the PV of a perpetuity with a cash flow of $111,111 received every year. The first cash flow occurs in year 1. The interest rate is 11% simple annual rate. b) Calculate the PV of a perpetuity with a cash flow of $222,222 received every second year. The first cash flow occurs in year 2. The interest rate is 11% simple annual rate. c) Calculate the PV of a perpetuity with a cash flow of $333,333 received every third year. The first cash flow occurs in year 3. The interest rate is 11% simple annual rate.

Answer 1

Answer:

a) Calculate the PV of a perpetuity with a cash flow of $111,111 received every year. The first cash flow occurs in year 1. The interest rate is 11% simple annual rate.

PV of a perpetuity = annual payment / interest rate = $111,111 / 11% = $1,010,100

b) Calculate the PV of a perpetuity with a cash flow of $222,222 received every second year. The first cash flow occurs in year 2. The interest rate is 11% simple annual rate.

PV of a perpetuity = annual payment / interest rate = $222,222 / (11% x 2) = $1,010,100

c) Calculate the PV of a perpetuity with a cash flow of $333,333 received every third year. The first cash flow occurs in year 3. The interest rate is 11% simple annual rate.

PV of a perpetuity = annual payment / interest rate = $333,333 / (11% x 3) = $1,010,100

Explanation:

Since the interest rate is simple, not compounded, the three perpetuities have the same present value.