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A perpetuity paying 50 at the end of each year forever starting 6 years from now...

A perpetuity paying 50 at the end of each year forever starting 6 years from now using an annual effective rate of interest of 10%.
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Answer #1

Ans. Value of perpetuity today is $38,116.88

Perpetuity is a constant stream of payments where payments are made at regular intervals forever.

Detailed Calculation :-

First, we need to find the value of the contract five years from now applying the present value of perpetuity formula.

PV of Perpetuity= Fixed Payment / Discount Rate (Annual effective rate)

The formula assumes that the first payment occurs at the end of the first year; therefore, applying this formula we will compute the value of the perpetuity in five years.

PV of Perpetuity=$50/.10=$500

Now, we will use the simple PV formula to find the value now of the above amount. The formula is:

Present Value=Future Value / (1+r)t

We should get the following:

Present Value=$500 /(1+.10)6

  = $38,116.88

Hence, $38,116.88 is the most that you would be willing to pay for this contract.

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