Question

How much would an investor be willing to pay for an investment which promises to pay $200 per year in perpetuity if the investor requires a 14 percent return on the investment? Round to the nearest cent. Do not include any unit (If your answer is $111.11, then type 111.11 without $ sign.)

Answer 1

Answer:

1428.57

Explanation:

A perpetuity assumes a constant cash flow streams over an infinite period. The Present Value or the value of a perpetuity can be calculated if the periodic/annual payment that a perpetuity pays and the interest rate or required rate of return is known.

In this question the present value that an investor, requiring 14% return, will attach to a perpetuity paying 200 annually can be calculated as follows,

PV or P =  Cash flow/ Interest or Required rate of Return

PV/P = 200/0.14  => 1428.57 rounded off to nearest cent