Moe purchases a $100, 30-year annuity. Larry purchases a $100 perpetuity. In both cases, payments begin in one year, and the appropriate interest rate is 10%. What is the present value of Larry's payments that will occur from year 31 onwards?

Question

Quizplus · Accepted Answer

The present value of a perpetuity starting in year 31 is calculated as the perpetuity value at year 30, discounted back to the present. The perpetuity value at year 30 is $100 / 0.10 = $1000. Discounting this back 30 years at 10% gives $1000 / (1.10)^30 = $57.31.

Moe Purchases a $100, 30-Year Annuity