A friend who owns a perpetuity that promises to pay $1,000 at the end of each year,

Question:

A friend who owns a perpetuity that promises to pay $1,000 at the end of each year, forever, comes to you and offers to sell you all of the payments to be received after the 25th year for a price of $1,000. Assume an interest rate of 10%. Be sure to show your work.

a. Should you pay the $1,000 today to receive payments from the end of year 26 and onwards?

b. What value would you be willing to pay?

c. What does this suggest to you about the value of perpetual payments?

Perpetuity
Perpetuity refers to payments that are made without an end or maturity date. A perpetuity is classified as an annuity, which is something that earns a dividend or receives a payment at a regularly scheduled interval, generally yearly. So, how...