Question

Determine the present value of perpetuity Rs. 10 per month for an infinite period at an effective rate of interest of 14% p.a.

A. Rs. 85.71
B. Rs. 100.00
C. Rs. 120.00
D. Rs. 70.00

Answer 1

The present value of a perpetuity with an equal payment of Rs. 10 per month for an infinite period at an effective rate of interest of 14% per year is approximately Rs. 857.14.

Step-by-step explanation:

To determine the present value of a perpetuity, we can use the formula:

PV = R / i

Where PV is the present value, R is the equal payment per period, and i is the effective rate of interest per period. In this case, the equal payment is Rs. 10 per month and the effective rate of interest is 14% per year. We need to convert the interest rate to a monthly rate by dividing it by 12. So:

i = 14% / 12 = 1.1667%

Now we can substitute the values into the formula:

PV = Rs. 10 / 1.1667% = Rs. 857.14

Therefore, the present value of the perpetuity is approximately Rs. 857.14. Therefore, the correct answer is option A: Rs. 85.71.