Perpetuities are also called annuities with an extended, or unlimited, life. Bas

Question

Perpetuities are also called annuities with an extended, or unlimited, life. Based on your understanding of perpetuities, answer the following questions Which of the following are characteristics of a perpetuity? Check all that apply. The value of a perpetuity cannot be determined. The value of a perpetuity is equal to the sum of the present value of its expected future cash flows. A perpetuity is a stream of unequal cash flows. The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows Your grandfather wants to establish a scholarship in his father's name at a local university and has stipulated that you will administer it. As you've committed to fund a $20,000 scholarship every year beginning one year from tomorrow, you'll want to set aside the money for the scholarship immediately. At tomorrow's meeting with your grandfather and the bank's representative, you will need to deposit can fund the scholarship forever, assuming that the account will earn 4.00% per annum every year. (rounded to the nearest whole dollar) so that you Oops! The bank representative just reported that he misquoted the available interest rate on the scholarship's account. Your account should earn 6.50%. The amount of your required deposit should be revised to This suggests there is value of the perpetuity relationship between the interest rate earned on the account and the present

Explanation / Answer

1) Perpetual cash Flow is a constant stream of Identical cash flow for an indefinite period .

Correct Option is :

B)The value of perpetuity is equal to sum of present value of its expected Future cash flow

D)The current value of perpetuity is based more on discounted value of its nearer (in time)cash flows and less by discounted value of its more distant cash flows.

2)Amount to deposit =Cash flow/Rate

     = 20000/.04

       = $500,000

3)Amount to deposit= 20000/.065

           = $ 307692.31

4)There is an inverse relationship between interest rate and present value (that is with increase in interest rate ,present value decreases)

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