You have two options 1) to receive £300 at Y/E for ever
or
2) receive £400 at Y/E for 25 years
market interest rate is 6%
how do i find the present values?
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Option 1You have two options
1) to receive £300 at Y/E forever
or
2) receive £400 at Y/E for 25 years
Market interest rate is 6%
How do i find the present values?
To receive $300 annually forever, the annual interest must be $300.
If $\displaystyle P$ is the present value, the interest for one year is .$\displaystyle 6\%\times P$
. . We have: .$\displaystyle 0.06P \:=\:300 \quad\Rightarrow\quad P \:=\:\$5000$
Option 2
To receive $400 annually for 25 years, use the formula: .$\displaystyle P \:=\:A\,\frac{r(1+r)^n}{(1+r)^n-1} $
. . where: .$\displaystyle \begin{Bmatrix}P &=& \text{Present value} \\ r &=& \text{Periodic interest rate} \\ n &=& \text{Number of periods} \\ A &=& \text{Periodic payment} \end{Bmatrix}$
We have: .$\displaystyle P \;=\;400\,\frac{(0.06)(1.06^{25})}{1.06^{25}-1} \;=\;5133.342463 \;\approx\;\$5113.34$
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