Question

Given an interest rate of 14.6 percent per year, what is the value at t = 8 of a perpetual stream of $1,250 annual payments that begin t =25

Answer 1

First solve for the Present Value of a perpetual stream of $1250 payments, using a discount rate of 14.6%.

This calculation is pretty simple as the formula is:

Payment Amount / Interest rate
1,250÷0.146=8,561.6438356164

Then, since you won't start receiving the annual payments for another 17 years (T=25 vs T=8), you need to discount that figure back another 17 years.

That formula is

PV=FV / (1 + i)^n
PV=8,561.6438356164÷(1+0.146)^(17)
PV=844.148 round your answer to get 844