CS Executive · Corporate Accounting and Financial Management · Time Value of Money
A trust pays Rs 6,000 at the end of every year forever to a school. If the discount rate is 8% per annum, the present value of this perpetuity is:
The present value is Rs 75,000. A level perpetuity paid at year-end is valued by dividing the annual payment by the discount rate, so 6,000 divided by 0.08 gives 75,000.
- ARs 48,000
- BRs 75,000Correct
- CRs 72,000
- DRs 80,000
Explanation
PV of an ordinary perpetuity = Cash flow / r = 6,000 / 0.08 = Rs 75,000. Rs 48,000 results from multiplying by the rate instead of dividing. Rs 80,000 is not derived from the data.
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