(Q15 IN TYPE B)HOW MUCH MORE IS A ANNUAL PERPETUITY OF $1,000 WORT...

Question

10. (Q15 in Type B)How much more is a annual perpetuity of $1,000 worth than an annual annuity of the same amount for 20 years? Assume a 9% interest rate and cash flows are at end of each year. A) $297.29 B) $1,486.44 C) $1,982.57  D) $2,000.00 Solution C. The perpetuity is worth $1000/.09 = $11,111.11 The PV of the twenty-year annuity = C * [1/r – 1/r(1+r)^t ] = $9128.55; or use your financial calculator. The difference between the perpetuity and annuity is $1982.57.

Answer

10. (Q15 in Type B)How much more is a annual perpetuity of $1,000 worth than an annual annuity of the same amount for 20 years? Assume a 9% interest rate and cash flows are at end of each year. A) $297.29 B) $1,486.44 C) $1,982.57  D) $2,000.00 Solution C. The perpetuity is worth $1000/.09 = $11,111.11 The PV of the twenty-year annuity = C * [1/r – 1/r(1+r)^t ] = $9128.55; or use your financial calculator. The difference between the perpetuity and annuity is $1982.57.

(Q15 IN TYPE B)HOW MUCH MORE IS A ANNUAL PERPETUITY OF $1,000 WORT...

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