Chapter 5-8 A local bank advertises the following deal: Pay us $100 at the end o

Question

Chapter 5-8

A local bank advertises the following deal: Pay us $100 at the end of each year for 12 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 4.00%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What is the present value of a $100 perpetuity deferred for 12 years if the interest rate available on other deposits is 4.00%. (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 12 years and then we will pay you (or your beneficiaries) $100 at the end of each year forever.

Explanation / Answer

year annuity present value@4% present value 1 100 0.961538 96.15385 2 100 0.924556 92.45562 3 100 0.888996 88.89964 4 100 0.854804 85.48042 5 100 0.821927 82.19271 6 100 0.790315 79.03145 7 100 0.759918 75.99178 8 100 0.73069 73.06902 9 100 0.702587 70.25867 10 100 0.675564 67.55642 11 100 0.649581 64.95809 12 100 0.624597 62.4597 sum of present value 938.5074 present value of perpetuity cash flow/rate 2500 no it is not a good deal

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