The great, great grandparents of one of your classmates sold their factory to the government 104 years ago for $150,000. If these proceeds had been invested at 6%, how much would this legacy be worth today? Assume annual compounding. 2. A friend who owns a perpetuity that promises to pay $1,000 at the end of each year, forever, comes to you and offers to sell you all of the payments to be received after the 25th year for a price of $1,000. At an interest rate of 10%, should you pay the $1,000 today to receive payment numbers 26 and onwards? What does this suggest to you about the value of perpetual payments?
1. The great, great grandparents of one of your classmates sold their factory to the
government 104 years ago for $150,000. If these proceeds had been invested at 6%,
how much would this legacy be worth today? Assume annual compounding.
2. A friend who owns a perpetuity that promises to pay $1,000 at the end of each year,
forever, comes to you and offers to sell you all of the payments to be received after the
25th year for a price of $1,000. At an interest rate of 10%, should you pay the $1,000
today to receive payment numbers 26 and onwards? What does this suggest to you
about the value of perpetual payments?
3. Your aunt, in her will, left you the sum of $5,000 a year forever with payments starting
immediately. However, the news is better. She has specified that the amount should
grow at 5% per year to maintain purchasing power. Given an interest rate of 12%, what
is the PV of the inheritance?
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