Question

You are considering paying $200,000 for an annuity today, and you know you need a yearly cash stream of $10,000 for expenses. What is the minimum annual interest rate (that would create a perpetual cash flow stream) needed for the annuity

Answer 1

The minimum annual interest rate needed to create the perpetual cash flow stream of $10,000 with a present value of $200,000 is 5%.

What is a perpetuity?

A perpetuity is an annuity that continues for ever. To determine the interest rate, we divide the annuity $10,000 by the present value investment of $200,000 and then multiply by 100.

Data and Calculations:

Present value of investment = $200,000

Annuity (yearly cash stream) - $10,000

Interest rate = 5% ($10,000/$200,000 x 100).

Thus, the interest rate needed to create the perpetual cash flow stream of $10,000 with a present value of $200,000 is 5%.

Learn more about perpetuity at brainly.com/question/17157614