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29 June, 13:19

Stuart Weddle's father is 55 years old and wants to set up a cash flow stream that would be forever. He would like to receive $15,000 every year, beginning at the end of this year. If he could invest in an account earning 9 percent, how much would he have to invest today to receive his perpetual cash flow?

a. $135,200

b. $166,667

c. $200,000

d. $222,222

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Answers (2)
  1. 29 June, 14:12
    0
    B

    Explanation:

    Perpetuity formula for present for present value to be invested today

    Pv = C / R

    where c is the amount of continuous cash payment and R is the interest rate

    PV = $ 15000 / 0.09 = $ 166666.67 approx $ 166667
  2. 29 June, 15:40
    0
    The correct option is B,$ 166,666.67 approximately $166,667

    Explanation:

    Present value of perpetual cash flow=yearly payment/rate of interest

    yearly payment is $15,000

    rate of interest is 9%

    Present value of perpetual cash flow=$15,000/9%

    =$ 166,666.67

    In order to receive $15,000 per year perpetually, Stuart Weddle would have to invest $ 166,666.67 today at the rate of return of 9%

    Option D, would be correct if the annual payment is $20,000 ($20000/9%=$ 222,222.22)
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