Question

A perpetuity will make $1000 payments at the end of each year starting from year 5...

A perpetuity will make $1000 payments at the end of each year starting from year 5 (i.e., first payment will occur at the end of year 5). If the discount rate is 7%, what is the present value of this perpetuity? Round your answer to the nearest dollar; do not include the $ sign (i.e., if the answer is $8,300.3562, enter it as 8,300).

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Answer #1

Answer - 10,186

Calculation :-

Step 1 - Calculate the value of Perpetuity :-

value of Perpetuity = Perpetuity / Rate

value of Perpetuity = 1000 / 0.07

value of Perpetuity = 14286

Step 2 - Calculate the Present value of Perpetuity :-

Since  first payment will occur at the end of year 5 (i.e. N=5), Hence we will Pull value of Perpetuity 5 years back :-

Present value of Perpetuity = (Value of Perpetuity / 1 + Discount Rate)N

Present value of Perpetuity = (14286 / 1.07)5

Present value of Perpetuity = 10,186

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