A local bank advertises the following deal: Pay us $100 at the end of each year for 10 years and then we will pay you (or your beneficiaries) $100 at the end of each year forever. Calculate the present value of your payments to the bank if the interest rate is 8.25%.Annuity Formula: *Note: Equal amounts w/a finite period; $100, 10 yearsPV = C x (1 - 1 / (1 + r)t / rr = 8.25%C = 100.00T = 10100 x (1 - 1 / (1 + .825)10 / .825100 x (1 - .002439 / .825100 x (1 - .002439 / .825100 x .997561 / .825100 x 1.209164PV = 120.92 What is the present value of a $100 perpetuity deferred for 10 years if the interest rate is 8.25%.Perpetuity Formula: *Note: Equal amounts w/ an infinite period; $100PV = C / rr = 8.25%C = 100.00PV = 100 / 8.25PV = 121.21 Is this a good deal?I would go with option A over option B. I’m investing less with option A at $120.92.

In the first question, to calculate the present value of payments to the bank will use formula of…

A local bank advertises the following deal: Pay us $100 at the end of each year for 10 years and then we will pay you (or your beneficiaries) $100 at the end of each year forever. Calculate the present value of your payments to the bank if the interest rate is 8.25%.

A local bank advertises the following deal: Pay us $100 at the end of each year for 10 years and then we will pay you (or your beneficiaries) $100 at the end of each year forever. Calculate the present value of your payments to the bank if the interest rate is 8.25%.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

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Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 8EA: You put $250 in the bank for S years at 12%. A. If interest is added at the end of the year, how...

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Question

A local bank advertises the following deal: Pay us $100 at the end of each year for 10 years and then we will pay you (or your beneficiaries) $100 at the end of each year forever.

Calculate the present value of your payments to the bank if the interest rate is 8.25%.

Annuity Formula: *Note: Equal amounts w/a finite period; $100, 10 years
PV = C x (1 - 1 / (1 + r)^t/ r
r = 8.25%
C = 100.00
T = 10
100 x (1 - 1 / (1 + .825)¹⁰/ .825
100 x (1 - .002439 / .825
100 x (1 - .002439 / .825
100 x .997561 / .825
100 x 1.209164
PV = 120.92

What is the present value of a $100 perpetuity deferred for 10 years if the interest rate is 8.25%.

Perpetuity Formula: *Note: Equal amounts w/ an infinite period; $100
PV = C / r
r = 8.25%
C = 100.00
PV = 100 / 8.25
PV = 121.21

Is this a good deal?

I would go with option A over option B. I’m investing less with option A at $120.92.

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