Question

What is the value today of receiving $1,774.00 per year forever? Assume the first payment is made next year and the discount rate is 11.00%.

Answer format: Currency: Round to: 2 decimal place

Suppose you deposit $2,951.00 into an account today that earns 13.00%. In 10.00 years the account will be worth $________.

Answer format: Currency: Round to: 2 decimal places.

Answer 1

First part:
We can determine the value using the following formula:
Value of perpetuity=(Annual Cash Inflows)/(Discount rate)
=1774/11%
=16127.27273 or 16127.27 (Rounded to 2 decimal places)

Hence, the value today of receiving the payments is $16127.27

Second part:
We need to use the time value of money equation to solve this question.
Future value=(Present value)*(1+Interest rate)^(Time period)
Substituting the values, we get;
Future value=(2951)*(1+13%)^(10)
=(2951)*(1.13)^(10)
=(2951)*3.394567
=10017.367217 or 10017.37 (Rounded to 2 decimal places)

Hence, in 10.00 years the account will be worth $10017.37