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Handout #9.0 - Solved Problems in Perpetuity

1. This document contains 10 examples calculating the present value of perpetuities - cash flows that occur continuously into the future - at different interest rates. It demonstrates how to calculate the present value of perpetuities that pay annually, semi-annually, or at other intervals using standard present value formulas.

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Eruel Cruz
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7K views3 pages

Handout #9.0 - Solved Problems in Perpetuity

1. This document contains 10 examples calculating the present value of perpetuities - cash flows that occur continuously into the future - at different interest rates. It demonstrates how to calculate the present value of perpetuities that pay annually, semi-annually, or at other intervals using standard present value formulas.

Uploaded by

Eruel Cruz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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PERPETUITY

1.IF MONEY IS WORTH 12%, FIND THE PRESENT VALUE OF PERPETUITY OF P20,000
PAYABLE AT THE BEGINNING OF EACH YEAR .
𝐴
𝑃 =𝐴+
𝑖
20000
𝑃 = 20000 +
0.12
𝑃 = 𝑃21666.67

2.IF MONEY IS 8%, OBTAIN THE PRESENT VALUE OF A PERPETUITY OF P1000 PAYABLE
ANNUALLY WHEN THE IRST PAYMENT DUE AT THE END OF 5 YEARS .
𝑃 𝑃[(1 + 𝑖)𝑛 − 1]
𝐴= −
𝑖 (1 + 𝑖)𝑛 𝑖
1000 1000[(1.08)4 − 1]
𝐴= −
0.08 (1.08)4 (0.08)
𝐴 = 𝑃9187.87

3.FIND THE PRESENT VALUE, IN PESOS, OF PERPETUITY OF P 15000 PAYABLE SEMI -


ANNUALLY IF MONEY IS WORTH 8% COMPOUNDED QUARTERLY .
0.08 4
(1 + ) = (1 + 𝑖)2
4
(1.02)4 = (1 + 𝑖)2
𝑖 = 0.0404 (𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑣𝑒𝑟𝑦 6 𝑚𝑜𝑛𝑡ℎ𝑠)
𝐴
𝑃=
𝑖
15000
𝑃=
0.0404
𝑃 = 371287

4.FIND THE PRESENT VALUE OF PERPETUITY OF 100 PAYABLE SEMI-ANNUALLY IF MONEY IS


WORTH 4% COMPOUNDED QUARTERLY .

0.04 4
(1 + ) = (1 + 𝑖)2
4
(1.01)4 = (1 + 𝑖)1
1 + 𝑖 = 1.0201
𝑖 = 0.0201 (𝑒𝑣𝑒𝑟𝑦 𝑠𝑖𝑥 𝑚𝑜𝑛𝑡ℎ𝑠)
𝑃
𝐴=
𝑖
100
𝐴= = 𝑃4975.12 (𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦)
0.0201
5.P45,000 IS DEPOSITED IN A SAVINGS ACCOUNT THAT PAYS 5% INTEREST COMPOUNDED
SEMI- ANNUALLY . EQUAL ANNUAL WITHDRAWALS ARE TO BE MADE FROM THE ACCOUNT ,
BEGINNING ONE YEAR FROM NOW AND CONTINUING FOREVER . COMPUTE THE MAXIMUM
AMOUNT OF THE EQUAL ANNUAL WITHDRAWAL .
0.05 2
(1 + ) = (1 + 𝑖)1
2
1 + 𝑖 = 1.050625
𝑖 = 0.050625
𝐴
𝑃=
𝑖
𝐴 = 45000(0.050625)
𝐴 = 𝑃2278.13

6.WHAT AMOUNT OF MONEY DEPOSITED 20 YEARS AGO AT 4% INTEREST WOULD PROVIDE


PERPETUAL PAYMENT OF P2,000 PER YEAR ?
𝐴
𝑃=
𝑖
2000
𝑃= = 𝑃50,000
0.04
𝐴𝑚𝑜𝑢𝑛𝑡 20 𝑦𝑒𝑎𝑟𝑠 𝑎𝑔𝑜:
𝐹 = 𝑃(1 + 𝑖)𝑛
50,000 = 𝑃(1.04)20
𝑃 = 𝑃22,819.35

7.WHAT PRESENT SUM WOULD BE NEEDED FOR ANNUAL END OF YEAR PAYMENTS OF
P25,000 EACH, FOREVER IF MONEY IS WORTH 22%
𝐴
𝑃=
𝑖
25000
𝑃=
0.22
𝑃 = 𝑃5500

8.FIND THE PRESENT VALUE, IN PESOS, OF PERPETUITY OF P 10,000 PAYABLE SEMI -


ANNUALLY IF MONEY IS WORTH 8% COMPOUNDED QUARTERLY .
0.13 4
(1 + ) = (1 + 𝑖)2
4
(1.0325)4 = (1 + 𝑖)2
𝑖 = 0.066056 (𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑣𝑒𝑟𝑦 6 𝑚𝑜𝑛𝑡ℎ𝑠)
𝐴
𝑃=
𝑖
10,000
𝑃=
0.066056
𝑃 = 𝑃151,386.70
9.WHAT PRESENT SUM WOULD BE NEEDED FOR ANNUAL END OF YEAR PAYMENTS OF
P15,000 EACH, FOREVER IF MONEY IS WORTH 8%
𝐴
𝑃=
𝑖
15000
𝑃=
0.08
𝑃 = 𝑃187,500.00

10.IF MONEY IS WORTH 4%, FIND THE PRESENT VALUE OF PERPETUITY OF P100 PAYABLE
AT THE BEGINNING OF EACH YEAR .
𝐴
𝑃 =𝐴+
𝑖
100
𝑃 = 100 +
0.04
𝑃 = 𝑃2600

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