All else constant, an individual would be indifferent between receiving $2,000 today or receiving a $200 perpetuity when the discount rate is 10% annually.

Question

Quizplus · Accepted Answer

The perpetuity formula is: PV = C/r, where PV is the present value, C is the cash flow or payment (in this case $200), and r is the discount rate (in this case 10%). Thus, PV = $200/0.1 = $2,000. So, receiving $2,000 today or receiving a $200 perpetuity with a discount rate of 10% would result in the same present value, making the individual indifferent between the two options.

All Else Constant, an Individual Would Be Indifferent Between Receiving