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Ed Cahill owns a farm near a small town. In exchange for allowing a road to...

Ed Cahill owns a farm near a small town. In exchange for allowing a road to pass through his farmland, hte town has agreed to pay Ed and future owners of the property $135 per year in perpetuity. The town offers, and Ed accepts, a one time payment of $1,125 in exchange for his giving up the right to receive the annual $135 payment. What is the implicit interest rate that Ed and the township used to arrive at this settlement?

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Answer #1

Let the implicit rate be "x"%

We know that present value of perpetuity = annual amount/interest rate

Thus 1125 = 135/x%

or x = 135/1125

= 12.00%

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