In: Finance
How much more is a perpetuity of $1600 worth than an annuity of the same amount for 24 years? Assume an annual interest rate of 13% and cash flows at the end of each period. Given annual compounding.
Ans 655.08
Present Value of Perpetuity = | Annual amount / Discount rate |
1600 / 13% | |
12307.69 |
PRESENT VALUE OF ANNUITY = | P [ 1 - ( 1 + r )^-n ] |
r | |
PRESENT VALUE OF ANNUITY = | 1600 * ( 1 - ((1 / (1 + 13%)^24))) |
13% | |
PRESENT VALUE OF ANNUITY = | 1514.839669 |
0.13 | |
PRESENT VALUE OF ANNUITY = | 11652.61 |
Difference = | 12307.69 - 11652.61 |
655.08 | |