Homework Answers
(a). Perpetuity payments begin in one year:
Then PV of perpetuity = Annual payment/EAR
EAR (effective annual rate) = (1+(R/m))^12 -1
where R = 12% and m = 12
EAR = (1+(0.12/12))^12 - 1 = 12.68%
PV of perpetuity = 1,000,000/12.68% = 7,884,878.87 (Answer)
(b). Perpetuity payments begin immediately:
PV of perpetuity due = Annual payment + (Annual payment/EAR)
= 1,000,000 + 7,88,878.87 = 8,884,878.87 (Answer)
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