Reference no: EM132393570

Today is January 1, year 1. Given a discount rate of 8%, calculate the following values.

a. Present value of a perpetuity (also called a perpetual annuity) of $50 received each year at the end of each year, i.e., each December 31 from now to the end of time

PV of a Level Perpetuity = C/I, PV = 50/0.08 = 625

b. Chop the perpetuity from part a into three parts, and calculate the present value today of each part:  

i. Part 1, an annuity of $50 received at the end of each year for 5 years, i.e., each December 31 from year 1 to year 5

ii. Part 2, an annuity of $50 received at the end of each year for 10 years, i.e., each December 31 from year 6 to year 15

iii. Part 3, a perpetuity of $50 received at the end of each year from year 16 to the end of time, i.e., each December 31 from year 16 and forever thereafter.

c. Add the parts of b together, and ensure that the total is the same as the value calculated in part a.