Question

a) According to the will made by my uncle before he died, I am expected to receive 40 € in one year from today and every year in perpetuity. What is the value of the above amount of money if the interest rate is 1) 8% and 2) 10%.
b) Then, I found out by reading better my uncle's will, that it provides that I will receive 40 € in a year from today and this amount will increase annually at a rate of 6%. What is the present value of the above amount of money if the interest rate is 1) 8% and 2) 10%.
Payments are overdue.

Answer 1

a. 1. The value is computed as shown below:

= 40 € / Interest rate

= 40 € / 8%

= 500 €

a. 2. The value is computed as shown below:

= 40 € / Interest rate

= 40 € / 10%

= 400 €

b.1. The value is computed as follows:

= 40 € / 1.08 + 1 / 1.08 x [ (40 € x 1.06) / (0.08 - 0.06) ]

= 40 € / 1.08 + 2,120 € / 1.08

= 2,000 €

b.2. The value is computed as follows:

= 40 € / 1.10 + 1 / 1.10 x [ (40 € x 1.06) / (0.10 - 0.06) ]

= 40 € / 1.10 + 1,060 € / 1.10

= 1,000 €

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