You need to purchase a financial asset that will pay you $80 per year forever, starting...

You need to purchase a financial asset that will pay you $80 per year forever, starting 5 years after the purchase is made. What is the value (PV) of this financial asset on the date that you bought it (year 0), given that the interest rate is 3% APR?

1. 2,666.67

2. 2,233.39

3. 2,369.30

4. 69.01

Expert Solution

The present value of perpetuity after 4 years is:
=(Amount paid each year)/APR
=80/3%=2666.666667
So, the present value after 4 years=2666.666667

Present value=(Future value)/(1 + APR)^(Time period)
=2666.666667/(1+3%)^4
=2666.666667/1.03^4
=2666.666667/1.12550881
=2369.298795 or 2369.30 (Rounded to 2 decimal places)

Hence, the present value will be $2369.30

jeff jeffy answered 2 years ago

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