The present value of a $25,000 perpetuity at a 14 percent discount rate is ___ A

Question

The present value of a $25,000 perpetuity at a 14 percent discount rate is ___

A. $285,000

B. $178,571

C. $219,298

D. $350,000

Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end of the twentieth year?

A. $144,104

B. $14,938

C. $19,292

D. $40,000

The present value of an ordinary annuity of $2,350 each year for eight years, assuming an opportunity cost of 11 percent, is _____

A. $12,093

B. $1,020

C. $27,869

D. $18,800

Explanation / Answer

Part - 1

Present Value of a perpetuity is A * 1/r = 25,000 * (1/0.14) = 178,571. Answer is Option B

Part -2

The future Value of an Annuity is Given by A[(1+r)^n-1]/r = 2000[(1+0.12)^20-1]/0.12 =144,104 . Answer is Option A

Part -3

Present Value of an anuuity is A[{1-(1/1+r)^n}/r] = 2350[{1-(1/1+0.11)^8}/0.11] = 12,093. Answer is Option A

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