You have just won a lottery that promises to pay you and your heirs $1000 dollars a month forever. How much could you get for this stream of cash if the rate of return is 6% compounded monthly?
A)$200,000
B)$166,667
C)$943,520
D)None of the above

Question

Quizplus · Accepted Answer

The present value of a perpetuity is the amount of money that, if invested at a given rate of return, would generate a stream of cash flows equal to the perpetuity's payments. In this case, the perpetuity's payments are $1000 per month, and the rate of return is 6% compounded monthly. The present value of this perpetuity is:PV = PMT / r= $1000 / (0.06 / 12)= $200,000Therefore, the correct answer is A.

You Have Just Won a Lottery That Promises to Pay