Your financial planner offers you two different investment plans. Plan X is a pe

Question

Your financial planner offers you two different investment plans. Plan X is a perpetuity with annual payments of $10,000. Plan Y is an annuity that lasts for 18 years and has annual payments of $18,000. Both plans will make their first payment one year from today.

At what discount rate would you be indifferent between these two plans? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

At what discount rate would you be indifferent between these two plans? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Formula of Present Value of perpetuity is:

PV = Annual Payments / R

Formula of Present Value of annuity is:

PV = Annual payments x Annuity P.V. factor

Where:

Annuity P.V. factor = (1

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