CA Foundation · Quantitative Aptitude · Mathematics of Finance
A trust wants to give a scholarship of ₹15,000 at the end of every year forever, with the first payment one year from now. If money earns 7.5% per annum, what amount must the trust invest today?
The trust must invest ₹2,00,000. The present value of a perpetuity paid at the end of each year is the annual payment divided by the interest rate, so 15,000 divided by 0.075 gives ₹2,00,000. Multiplying the two figures instead would give a meaningless amount.
- A₹1,125
- B₹1,87,500
- C₹2,00,000Correct
- D₹2,15,000
Explanation
Present value of an ordinary perpetuity = payment / rate = 15,000 / 0.075 = ₹2,00,000. ₹1,125 results from multiplying instead of dividing. ₹2,15,000 would apply to a perpetuity due, where the first payment is made immediately.
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