CS Executive · Corporate Accounting and Financial Management · Time Value of Money
A perpetuity-due pays Rs 2,000 at the beginning of every year forever. At a discount rate of 10%, its present value is:
The present value is Rs 22,000. The first payment of Rs 2,000 occurs now, so the value equals the ordinary perpetuity value of Rs 20,000 plus the immediate Rs 2,000 payment.
- ARs 20,000
- BRs 18,182
- CRs 22,000Correct
- DRs 24,000
Explanation
Perpetuity-due PV = C/r x (1+r) = 20,000 x 1.10 = Rs 22,000, or equivalently 2,000 + 20,000. Rs 20,000 is the ordinary perpetuity value, which ignores that the first payment is immediate.
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