Question

Given an interest rate of 5.3 percent per year, what is the value at date t = 7 of a perpetual stream of $6,400 payments that begins at date t = 15?

Answer 1

Answer:

$84,121.21

Explanation:

For computing the value, first we have to determine the PMT which is shown below:

= Payment ÷ interest rate

= $6,400 ÷ 5.3%

= $120,754.7170

Now the value at year 7 would be

= PMT ÷ (1 + interest rate)^number of years

= $120,754.7170 ÷ (1 + 5.3%)^7

= $120,754.7170 ÷ 1.4354848003

= $84,121.21

So, the value at date is $84,121.21