A local bank advertises the following deal: Pay us $100 at the end of each year

Question

A local bank advertises the following deal: Pay us $100 at the end of each year for 12 years and then we will pay you (or your beneficiaries) $100 at the end of each year forever. a. Calculate the present value of your payments to the bank if the interest rate available on other deposits is 5.75%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value $ b. What is the present value of a $100 perpetuity deferred for 12 years if the interest rate available on other deposits is 5.75%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value $ c. Is this a good deal? Yes No

Explanation / Answer

Calculate the present value of your payments to the bank if the interest rate available on other deposits is 5.75%

Present Value of payment= 100/0.0575*(1-(1/(1.0575)^12))

present value of your payments to the bank if the interest rate available on other deposits is 5.75%= $850

b. What is the present value of a $100 perpetuity deferred for 12 years if the interest rate available on other deposits is 5.75%.

PV of perpetuity deferred for 12 years = (100/0.0575)*(1/1.0575^12)

PV of perpetuity deferred for 12 years =$889.13

C: This is a good deal.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.