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Suppose that Ed Scahill owns a farm in a small town. In exchange for allowing a...

Suppose that Ed Scahill owns a farm in a small town. In exchange for allowing a road to pass

through his farmland, the town has agreed to pay Ed and the future owners of the land $135

per year in perpetuity. Now, however, the town has offered, and he has accepted, a one-time

3payment of $1,125 in exchange for his giving up the right to receive the annual $135 payment.

What implicit interest rate have Ed and the township used in arriving at this settlement?

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Answer #1

to let the implicit rate be x% 1. We know that present value of perpetuity = annual amount / interest rate Thus ua5 = 135/2 %

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