Question

Perpetuity A pays $0.50 per year, but its 1st payment will be in 1 year from...

Perpetuity A pays $0.50 per year, but its 1st payment will be in 1 year from today. Perpetuity B pays $1 every two years, and its 1st payment will be in 2 years from today. Which perpetuity will you choose if the annual interest rate is 5%?

(a). A

(b). B

(c). They are of same value

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Homework Answers

Answer #1

Given,

Perpetuity A payment = $0.50

Perpetuity B payment = $1.00

Annual interest rate = 5% or 0.05

Solution :-

Present value of perpetuity A = perpetuity A payment annual interest rate

= $0.50 0.05 = $10

Two year interest = 0.05 x 2 = 0.10

Present value of perpetuity B = perpetuity B payment two year interest

= $1.00 0.10 = $10

They are of same value.

Thus, option 'c' is correct.

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