Question

You are offered $150 in exactly one year. Each year thereafter forever, you (or your estate) will receive an amount 2% higher than the previous year (so you will receive $153 in exactly two years, for example). From a purely present value perspective, would you prefer this infinite stream of payments or $10,000 cash today? Assume the interest rate is always 4%.

Answer 1

Present Value of Perpetuity = $7,500

Step-by-step explanation:

given data

offered = $150 in

receive an amount = 2% higher

receive = $153

interest rate = 4%

solution

we find here Present Value of Perpetuity that is express as

Present Value of Perpetuity =
`(150)/(0.04 - 0.02)`

Present Value of Perpetuity = $7,500

so here we

prefer $10,000 today as it has higher value