Given an interest rate of 7.05 percent per year, what is the value at Year 11 of

Question

Given an interest rate of 7.05 percent per year, what is the value at Year 11 of a perpetual stream of $3,800 payments that begin at Year 18? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Given an interest rate of 7.05 percent per year, what is the value at Year 11 of a perpetual stream of $3,800 payments that begin at Year 18? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

1)

The total value of perpetuity is as follows:

=Cash flows/Discount rate

=3,800/7.05%

=$53,900

The present value of perpetuity at 11 year is as follows:

=53,900*Present value factor at 7.05% at 11th year

=53,900*0.475

=$25,602

Hence, it is $25,602.

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