In: Finance
A perpetuity immediate pays 1000 each month for 7 years, and then 500 each month thereafter. If the nominal annual interest rate is 3% convertible monthly, and the present value of the perpetuity. Be sure to include the appropriate equation or expression of value that you use.
PV of Perpetuity = Perpetual Cash Flows / Interest Rate
Monthly Interest Rate = 3%/12 = .25%
PV of Perpertuity at end of Year 7 = 500 / .25%
PV of Perpertuity at end of Year 7 = 200,000
Present value at time 0 = FV / (1+int%)^n
Present value at time 0 = 200,000 / (1.03)^7
Present value at time 0 of perpetual payments of 500 every month = 162,618.30
Present Value of monthly payments of 1000 each month for 7 years.
Monthly Payments (PMT) = 1,000
Interest (i/Y) = .25%
Number of Periods in months (N) = 7 * 12 = 84
Future Value = 0
Period : END
Using PV Function in excel and inputting the above mentioned values
Present Value = 75,681.32
OR Using Financial Calculator and inputting the above mentioned values. Then Press "CPT" and then "PV"
Present Value = 75,681.32
Total Present Value of Perpetual Payments = 162,618.30 + 75,681.32
Total Present Value of Perpetual Payments = 238,299.62