Your financial planner offers you two different investment plans. Plan X is a $10,000 annual...

Question:

Your financial planner offers you two different investment plans. Plan X is a $10,000 annual perpetuity. Plan Y is an 18-year, $18,000 annual annuity. Both plans will make their first payment one year from today. At what discount rate would you be indifferent between these two plans?

Present Value of an Annuity:

In finance, an annuity is an equal payment made at regular time intervals over a defined period of time. However, sometimes the annuity payment can be made forever and it is considered to be a perpetuity. The present value of an annuity is the current worth of the payments discounted by applying the concept of the time value of money. It is important to know the correct equations when calculating the present value.

Answer and Explanation: 1

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Plan X is a $10,000 annual perpetuity.

The equation for the present value of a perpetuity is:

{eq}\begin{align*} \ PV_{perpetuity} & =...

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How to Calculate the Present Value of an Annuity

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Chapter 8 / Lesson 3
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Learn how to find present value of annuity using the formula and see its derivation. Study its examples and see a difference between Ordinary Annuity and Annuity Due.


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