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11 February, 17:39

You are offered the right to receive $1000 per year forever, starting in one year. If your discount rate is 5%, what is this offer worth to you

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  1. 11 February, 19:10
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    Worth of the offer = $20,000

    Explanation:

    The worth of this offer is the present value of the annual cash inflow receivable forever discounted at the given interest rate. The cash inflow receivable forever is known as a perpetuity

    The present of a cash inflow receivable forever is given below:

    PV = A * 1/r

    A - annual cash inflow, r - discount rate, PV - Present value of a perpetuity

    A - 1,000, r - 5%

    PV = 1,000 * 1/0.05

    PV = $20,000

    Worth of the offer = $20,000
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