Question

In: Finance

How much more is a perpetuity of $1600 worth than an annuity of the same amount...

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.

Solutions

Expert Solution

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

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