Homework Answers
The present value of Perpetuity X can be determined as follows
The present worth of Y can be written as
![P(1.05) 2P(1.05 = PWy = 11.052 * 1.052 +1 1.054 3P(1.05) 3P + 1.054+ 1.056 + 1056] + ......00](http://img.homeworklib.com/questions/e98156f0-7a71-11ea-b1b6-03237cda7e38.png?x-oss-process=image/resize,w_560)
We can solve this problem by shifting the value of P
For example calculate the value of P at the end of two year
At 2 year Cash flow = P(1.05) + P = 2.05P
At year 4, CF = 2P(1.05) + 2P = 4.10P
At year 6, CF = 3P(1.05) + 3P = 6.15P
At year 8, CF = 4P(1.05)+4P = 8.20P
Like wise we can convert the cash flow of odd years into the cash flow at the end of even years.
Interest rate = 5% per year
Calculate the effective interest rate for 2 year
Effective interest rate = 10.25% per two years
The present value of Y is equal to present value of X.
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The answer should be 1.9524
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