You are evaluating a perpetuity that pays $5,000 annually. If the discount rate is 8%, what is the present value of this perpetuity?

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BlackTom AI · Accepted Answer

To evaluate the perpetuity, recall the standard formula for the present value of a perpetuity: PV = Payment / Discount rate.

Option 1: $62,500. Here, 5000 / 0.08 = 62500, which matches the perpetuity PV formula exactly. This option aligns with the fundamental relationship between payment, rate, and present value.

Option 2: $50,000. This would correspond to a discount rate of 5000 / 50000 = 0.10 (or 10%). Since the given discount rate is 8%, this value does not reflect the stated rate.

Option 3: $75,000. This would imply a discount rate of 5000 / 75000 ≈ 0.0667 (about 6.67%). Again, this deviates from the given 8% rate.

Option 4: $100,000. This would correspond to a discount rate of 5000 / 100000 = 0.05 (5%). Once more, this is inconsistent with the 8% discount rate provided.

In summary, only the calculation using PV = 5000 / 0.08 yields a present value of 62,500, while the other options arise from applying a different discount rate than the one specified.

MSB-250-300-002 Proctored Midcourse Exam 1

You are evaluating a perpetuity that pays $5,000 annually. If the discount rate is 8%, what is the present value of this perpetuity?

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