Today is January 1, year 1. Given a discount rate of 8%, calculate the following values.
Question:
Today is January 1, year 1. Given a discount rate of 8%, calculate the following values.
a. Present value of a perpetuity (also called a perpetual annuity) of $50 received each year at the end of each year, i.e., each December 31 from now to the end of time
b. Chop the perpetuity from part a into three parts, and calculate the present value today of each part:
i. Part 1, an annuity of $50 received at the end of each year for 5 years, i.e., each December 31 from year 1 to year 5
ii. Part 2, an annuity of $50 received at the end of each year for 10 years, i.e., each December 31 from year 6 to year 15
iii. Part 3, a perpetuity of $50 received at the end of each year from year 16 to the end of time, i.e., each December 31 from year 16 and forever thereafter.
c. Add the parts of b together, and ensure that the total is the same as the value calculated in part a.
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon