Question

Calculate the Capitalized Cost of a perpetual annuity starting at 5 years from now with an annuity amount of $1,000 per year at an annual interest rate at: 10% per year

a. 7,903 b. 6,830 c. 5,987 d. 7,120

Answer 1

Cost of annuity at the end of year 4
Present Value of Perpetuity
PV=A/r-g
PV= Present Value
A= Annuity
r= interest rate
g= growth rate
=$1000/0.1-0
=$10,000
Todays value
PV= FV/(1+r)^n
Where,
FV= Future Value
PV = Present Value
r = Interest rate
n= periods in number
= $10000/( 1+0.1)^4
=10000/1.4641
= $6830.13
Correct Answer = b. 6,830
NOTE: ASK YOUR QUERIES.PLEASE DO UPVOTE