YOU ARE COMPARING A PERPETUITY HAVING ANNUAL PAYMENTS OF $5,000, WI...

9. You are comparing a perpetuity having annual payments of $5,000, with a 20-year annuity having the same payments. If interest rates are 7% annually and the payments begin immediately, which of the following statements are true? A) The present value of the perpetuity payments is $71,428 B) The present value of the annuity stream is $52,970 C) The perpetuity is worth over $19,000 more than the annuity stream D) Both A) and B) are true E) None of the above statements is true. Solution C The perpetuity due is worth $5000/.07 + $5,000 = $76,428.57 The PV of the twenty-year annuity due: Use your financial calculator and set the BGN function: FV =0, PMT = 5,000; I/Y = 7%; n= 20, COMP PV PV = $56,677.98 The difference between the perpetuity and annuity is $19,750.59