A local bank advertises the following deal: \"Pay us $100 a year for 12 years an

Question

A local bank advertises the following deal: "Pay us $100 a year for 12 years and then we will pay you (or your beneficiaries) $100 a year forever" a. Calculate the present value of your payments to the bank, if the interest rate available on other deposits is 7.25% (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value b. What is the present value of a $100 perpetiuty deferred for 12 years, if the interest rate available on other deposits is 7.25%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value c. Is this a good deal? O No Yes

Explanation / Answer

a.

present value=100/(1+7.25%)^1+100/(1+7.25%)^2+100/(1+7.25%)^3+100/(1+7.25%)^4+100/(1+7.25%)^5+100/(1+7.25%)^6+100/(1+7.25%)^7+100/(1+7.25%)^8+100/(1+7.25%)^9+100/(1+7.25%)^10+100/(1+7.25%)^11+100/(1+7.25%)^12

=783.79

b.

present value=(100/7.25%)/(1+7.25%)^12=595.52

c.

No, because present value of income is lower than the present value of payments

the above is answer..

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