A local bank advertises the following deal: Pay us $100 at the end of each year
ID: 2613353 • Letter: A
Question
A local bank advertises the following deal: Pay us $100 at the end of each year for 10 years and then we will pay you (or your beneficiaries) $100 at the end of each year forever.
Calculate the present value of your payments to the bank if the interest rate available on other deposits is 8.75%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is the present value of a $100 perpetuity deferred for 10 years if the interest rate available on other deposits is 8.75%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
A local bank advertises the following deal: Pay us $100 at the end of each year for 10 years and then we will pay you (or your beneficiaries) $100 at the end of each year forever.
Explanation / Answer
A.
Present value = $ 6,484.00
B. Present Value of a perpetuity is used to determine the present value of a stream of equal payments that do not end. The present value of a perpetuity formula can also be used to determine the interest rate charged, and the size of the regular payment. Use the perpetuity calculator below to solve the formula..
Perpetuity is a stream of equal payments that does not end.
Formula
PV=Present value of the perpetuity
Pmt=Payment amount
R=Annual interest rate
PV = $100 / 8.75
= $1142.85
C. Is this a good deal?
Yes
Year Amount P.V Factore @8.75 P.V 1 $ 1,000.00 0.919 $ 919.00 2 $ 1,000.00 0.845 $ 845.00 3 $ 1,000.00 0.777 $ 777.00 4 $ 1,000.00 0.714 $ 714.00 5 $ 1,000.00 0.657 $ 657.00 6 $ 1,000.00 0.604 $ 604.00 7 $ 1,000.00 0.555 $ 555.00 8 $ 1,000.00 0.511 $ 511.00 9 $ 1,000.00 0.47 $ 470.00 10 $ 1,000.00 0.432 $ 432.00 Total $ 10,000.00 $ 6,484.00Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.