Question

An investment offers $157 per year forever, with the first payment occurring today. If the interest rate is 6.7% (per year, with annual interest compounding), the value of the entire investment today is $_____________.

Answer 1

$2,500

Step-by-step explanation:

we need to calculate the present value using the perpetuity formula plus the initial payment:

present value of this perpetuity = cash flow year 0 + (yearly cash flow / annual interest rate)

PV = $157 (earned today) + $157 / 6.7% = $157 + $2,343.28 = $2,500.28 ≈ $2,500