How much more is a perpetuity of $1000 worth than an annuity of the same amount...

How much more is a perpetuity of $1000 worth than an annuity of the same amount for 18 years? Assume an interest rate of 8% and cash flows at the end of each period.

Expert Solution

Present value of perpetuity=Annual cash flows/interest rate

=1000/0.08

=$12500

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=1000[1-(1.08)^-18]/0.08

=1000*9.37188714

=$9371.89(Approx)

Hence excess value=12500-9371.89

=$3128.11(Approx)

jeff jeffy answered 2 years ago

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