The interest rate is 10% and is expected to stay constant at that level forever.The present discounted value of $50,000 a year forever starting today is
A)$500,000.
B)$550,000.
C)$ infinity.
D)$1 million.
E)$45,454.45.

Question

Quizplus · Accepted Answer

The present discounted value formula is: 
Present value = Cash flow / (interest rate * discount factor)

Since the interest rate is expected to stay constant forever, the discount factor is simply 1 / (1 + i) = 1 / (1 + 0.1) = 0.9091.

Therefore, the present discounted value of $50,000 a year forever starting today is:
Present value = $50,000 / (0.1 * 0.9091) = $550,000.

So, the best choice is B.

The Interest Rate Is 10% and Is Expected to Stay