Question

What’s the present value of a perpetuity that pays $1,000 per year beginning 1 year from now, if the appropriate interest rate is 5%? What would the value be if payments on the annuity began immediately? ($20,000, $21,000. Hint: Just add the $1,000 to be received immediately to the value of the annuity.)

Answer 1

A.	Present value of perpetuity	=	C	/	r		Where,
		=	$    1,000	/	5%		C	=	$       1,000
		=	$ 20,000				r	=	5%
B.	Present value of perpetuity	=	Present value above	+	C
		=	$ 20,000	+	$    1,000
		=	$ 21,000