costs. d.Opportunity e. Sunk costs that have been expensed for tax purposes. QUE
ID: 2805393 • Letter: C
Question
costs. d.Opportunity e. Sunk costs that have been expensed for tax purposes. QUESTION 4 What's the present value of a perpetuity that pays $3,000 per year if the appropriate interest rate is 5%? o a. $55,200.00 b.$60,000.00 c. $71,400.00 d.$47,400.00 e.$63,000.00 QUESTION 5 You have a chance to buy an annuity that pays S 12.400 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? a. $33,454.37 b.$36,799.81 O c. $35,127.09 d. $39,141.62 e.$38,137.99 Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All AnswerExplanation / Answer
PV of perpetuity = $60000 (B)
PV of annuity = 33454.37 (A)
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Perpetuity is equal amount of cash flow that is received in future for infinite period.
If periodic payment is P, and interest rate is r then present value of perpetuity is
PV of perpetuity= P/ r
Let's put all the values in the formula
PV of perpetuity= 3000/ 0.05
= 60000
PV value of perpetuity is 60000
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Present value of annuity is the present worth of cash flows that is to be received in the future, if future value is known, rate of interest in r and time is n then PV of annuity is
PV of annuity= P[1- (1+ r)^-n]/ r
= 12400[1- (1+ 0.055)^-3]/ 0.055
= 12400[1- (1.055)^-3]/ 0.055
= 12400[1- 0.851613664183823]/ 0.055
= 12400[0.148386335816177/ 0.055]
= 12400[2.69793337847595]
= 33454.3738931018
So PV of the amount after 3 years is 33454.3738931018
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Hope that helps.
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