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Mo will receive a perpetuity of $27,000 per year forever, while Curly will receive the same...

Mo will receive a perpetuity of $27,000 per year forever, while Curly will receive the same annual payment for the next 40 years. If the interest rate is 7.1 percent, how much more are Mo's payments worth?

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Answer #1

Mo:

Present value of perpetuity=Annual inflows/interest rate

=27000/0.071

=$380,281.69(Approx).

Curly:

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=27000[1-(1.071)^-40]/0.071

=27000*13.17843482

=$355,817.74(Approx).

Hence difference =$380,281.69-$355,817.74

=$24463.95(Approx).

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