3) Tobi owns a perpetuity that will pay $1,500 a year, starting one year from now. He offers to sell you all of the remaining payments after the next 25 payments have been paid. (A) What price should you offer him for payments 26 onward if you desire a rate of return of 8 percent

Answers 2


you should pay up to $2,737.84 to Tobi


first, the terminal price of the perpetuity must be determined = annual payment / r = $1,500 / .08 = $18,750

now, the present day value of the future terminal value

present value = future value / (1 + r)ⁿ = $18,750 / (1 + 8%)²⁵ = $2,737.84

AI generated Answer

Quick Answer: The price should be $16,032.17. Full explanation: To calculate the price of Tobi's perpetuity, we first need to calculate the present value of all future payments, discounted back to the present at 8%. Since the first payment is one year from now, the present value of the payments (i.e. the discounted value of the cash flows) can be calculated as follows: Present Value = Payment * (1- (1+r ) ^-n) / r Where: Payment = $1,500 (the amount of each future payment) r = 0.08 (the desired rate of return) n = 25 (the number of payments in the future) Substituting the values into the formula, we get the following: Present Value = 1,500 * (1 - (1 + 0.08)^ -25) / 0.08 = 1,500 * (1 - 0.5922) / 0.08 = 1,500 * 0.4078 / 0.08 = 16,032.17 Therefore, the price that you should offer Tobi for payments 26 onward is $16,032.17.
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