A potential investment pays $10 per year indefinitely.The appropriate discount rate for the potential investor is 10%.The present value of this cash flow is calculated by:
A)multiplying $10 by the appropriate present value factor
B)dividing $10 by 10
C)multiplying $10 by the present value factor of an annuity
D)dividing $10 by .10

Question

Quizplus · Accepted Answer

The present value of a perpetuity is calculated by dividing the annual cash flow by the discount rate. Here, $10 divided by 0.10 equals $100.

A Potential Investment Pays $10 Per Year Indefinitely