John owns a perpetuity that will pay $1,500 a year, starting one year from now and will grow at 2 percent each year. He offers to sell you all of the remaining payments after the next 25 payments have been paid. He is willing to sell you the payments starting year 26 if you agree to pay him half the value today and half of it upon transfer in year 25. Assuming a discount rate of 8 percent how much would you pay him today and how much in year 25? Answer: $2,994.47 today and $20,507 in year 25. Logic: First figure out how much you will have going into the perpetuity in year 26 (or how much will $1,500 be worth after 25 years if it is growing at 2%). Once you have that, calculate what a perpetuity is worth in Year 25 with the cashflow that you just calculated. Half of that amount will be paid in Year 25 and the PV0 will be paid out in Year 0 today

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