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stranahan stranahan
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7 years ago
Your neighbor owns a perpetuity of $100 per year that has a discount rate of 6% per year. He offers to sell to you all but the next 20 cash flows (the first to be received one year from today) for $500. In other words, he keeps the first 20 cash flows of his perpetuity and you get all of the rest. Is this a good price for you if the appropriate discount rate is 6%?
A) No, because the cash flows you receive are only worth $482.16 and that is less than the $500 your neighbor is asking for the cash flows.
B) No, because the entire perpetuity is worth only $1,666.67 and your neighbor is taking the best cash flows worth more than $1,200 in present value terms
C) Yes, because the present value of the remaining cash flows is $519.68 and you are buying them for only $500.
D) This question cannot be answered.
Textbook 
Financial Management: Core Concepts

Financial Management: Core Concepts


Edition: 2nd
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BleedingDrBleedingDr
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7 years ago
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stranahan Author
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7 years ago
Thanks Smiling Face with Open Mouth and Tightly-closed Eyes
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