A perpetuity will pay $1,025 per year, starting five years after the perpetuity is purchased

A perpetuity will pay $1,025 per year, starting five years after the perpetuity is purchased. What is the present value of this perpetuity on the date that it is purchased, given that the interest rate is 9%. Show your work or inputs.

Expert Solution

Perpetuity payment per period= $1025

Interest Rate= 9%

Present Value of the Perpetuity= PMT/i= 1025/0.09= 11,388.8889

However, since the perpetuity doesn't start paying until 5 years from the date of purchase, the value calculated above is at time t=5. We need value at t=0. So we discount it at 9%p.a.

Present Value on Date of Purchase= 11388.8889/(1.09)⁵= $ 7,401.996

jeff jeffy answered 2 years ago

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