What is the value of an investment that pays $35,000 every other year forever, if the...
What is the value of an investment that pays $35,000 every other year forever, if the first payment occurs two years from today and the discount rate is 7 percent compounded daily?
Homework Answers
Annual payment = $ 35000
Discount rate = 7%
compounding = Daily
Present Value of a Perpetuity = Annual Payment ÷ Discount Rate
We need to determine a two-year interest rate. Since the compounding is daily,
The formula is (1 + (i / 365)) ^ (365 * 2) - 1
= (1 + .07 / 365) ^ 730 - 1 = .15026, or 15.026%
PV = $ 35000 / 0.15026
Present Value of a Perpetuity = $ 232,932
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