You are comparing three investments,all of which pay $100 a month and have an 8 percent interest rate.One is ordinary annuity,one is an annuity due,and the third investment is a perpetuity.Which one of the following statements is correct given these three investment options?

Question

Quizplus · Accepted Answer

A perpetuity is a stream of cash flows that continues indefinitely, and its present value is calculated using the formula PV = C/i, where C is the cash flow and i is the discount rate. In this case, the present value of the perpetuity would be $100/0.08 = $1250. However, the present value of the ordinary annuity and the annuity due, which both have a finite life span, would be calculated using the formula PV = C[(1- (1+i)^-n)/i], where n is the number of periods. The present value of the ordinary annuity and the annuity due would both be less than $1250 due to their finite life span. Therefore, option C is correct.

You Are Comparing Three Investments,all of Which Pay $100 a Month