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March 26, 2017

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what is the present value of a perpetuity of $2500 per year given an interest rate of 8.25% p.a? (assume the first cash is four years from today)

  • finance - ,

    The assumption that the first payment is made 4 years from now should have been an essential part of the question, not an afterthought in brackets.

    So three years from now there has to be sufficient money in the fund to provide interest of 2500 in one year.
    P=I/(rt) = 2500/.0825 = $30,303.03

    how much is that worth now ?
    Present Value = 30303.03(1.0825)^-3
    = $23,889.24

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