Which of the following alternatives signify the difference between the present value of a $150 perpetuity and 2-year $150 annuity, both discounted at 15 percent per annum.
A)The perpetuity would require an initial investment worth $100 while the annuity would require an initial investment worth $244.07.
B)The perpetuity would require an initial investment worth $1,500 while the annuity would require an initial investment worth $115.07.
C)The perpetuity would require an initial investment worth $1,000 while the annuity would require an initial investment worth $244.07.
D)The perpetuity would require an initial investment worth $100 while the annuity would require an initial investment worth $115.07.

Question

Quizplus · Accepted Answer

The present value of a perpetuity is calculated using the formula PV = C / r, where C is the cash flow per period and r is the discount rate. For a $150 perpetuity at 15%, PV = $150 / 0.15 = $1,000. The present value of an annuity is calculated using the formula PV = C * [1 - (1 + r)^-n] / r, where C is the cash flow per period, r is the discount rate, and n is the number of periods. For a 2-year $150 annuity at 15%, PV = $150 * [1 - (1 + 0.15)^-2] / 0.15 = $244.07.

Which of the Following Alternatives Signify the Difference Between the Present