CMA Intermediate · Financial Management and Business Data Analytics · Time Value of Money
A perpetuity pays ₹12,000 at the end of every year forever. If the required rate of return is 8% p.a., what is its present value?
The present value is ₹1,50,000, found by dividing the annual payment of ₹12,000 by the 8% discount rate. Multiplying the payment by the rate would be a mistake and gives only ₹96,000, which is not a value of a perpetuity.
- A₹1,50,000Correct
- B₹96,000
- C₹1,62,000
- D₹1,00,000
Explanation
PV of a perpetuity = cash flow / rate = 12,000 / 0.08 = ₹1,50,000. Check: 1,50,000 × 8% = 12,000. Multiplying instead of dividing gives ₹96,000, which is wrong.
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