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Calculate the present value of a perpetuity that pays $10,000 annually (at the startof each year) forever. The interest rate is 8%

Question

Calculate the present value of a perpetuity that pays $10,000 annually (at the startof each year) forever. The interest rate is 8%

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Solution

The formula for the present value of a perpetuity is:

PV = C / r

where:

  • PV is the present value
  • C is the cash flow per period (in this case, the annual payment)
  • r is the interest rate

Given that C = $10,000 and r = 8% or 0.08, we can substitute these values into the formula:

PV = $10,000 / 0.08

Therefore, the present value of the perpetuity is $125,000.

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