Question

Given an interest rate of 10.0 percent per year, what is the value at date t = 7 of a perpetual stream of $900 payments with the first payment at date t = 16?

Answer 1

The question is solved by first computing the present value of perpetual cash stream.

Present value= Annual payment/ Interest rate

                          = $900/0.10

                          = $9,000.

The value at date t=7 is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 9,000

N= 9

I/Y= 10

Press the CPT key and PV to compute the present value.

The value obtained is 3,816.88.

Therefore, the value at t=7 of a perpetual cash stream is $3,816.88.

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