## PRACTICE EXERCISE 3.4

21. You are offered a contract that will pay $50.00 per year indefinitely. If your
discount rate is 10%, what would you be willing to pay for the offered contract?

$_______________________

22. If your required return is 10%, what would you be willing to pay for a perpetuity
cash flow of $5.00 per year?

$_______________________

ANSWER KEY

21. You are offered a contract that will pay $50.00 per year indefinitely. If your
discount rate is 10%, what would you be willing to pay for the offered contract?
$500.00
PVp = A x (1/R)
PVp = $50.00 (1 / 0.10)
PVp = $500.00

22. If your required return is 10%, what would you be willing to pay for a perpetuity
cash flow of $5.00 per year?
$50.00
PVp = A x (1/R)
PVp = $5.00 (1 / 0.10)
PVp = $50.00

UNIT SUMMARY

In this unit, we focused on the changes in the value of money over
time.

Future value - simple / compound

interest

The future value of money at the end of a defined period of time
results from adding the amount of interest that may be earned on an
investment to the principal amount.
Simple interest is paid on the principal at the end of the payment
period at a defined rate.

Interest also may be compounded, which means that interest is
reinvested after each payment period and earns interest in each
subsequent period. Interest may be compounded at the end of
discrete annual or non-annual periods, or continuously throughout
the life of the investment.

The continuation/full version of this article read on site www.history-society.com - Basics of Corporate Finance