Chapter2-wk3 - Chapter 2 Contd Perpetuities Suppose you...

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Chapter 2 Cont’d
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Perpetuities 2 i PMT PV = Suppose you will receive a fixed payment every period (month, year, etc.) forever. This is an example of a perpetuity. PV of Perpetuity Formula PMT = periodic cash payment i = interest rate
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Perpetuities & Annuities 3 Example - Perpetuity You want to create an endowment to fund a football scholarship, which pays $15,000 per year, forever, how much money must be set aside today if the rate of interest is 5%? 000 , 300 $ 05 . 000 , 15 = = PV 000 , 300 $ 05 . 000 , 15 = = PV
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More Annuity Fun! (Discussion section) 4 Springfield mogul Montgomery Burns, age 85, wants to retire at age 100 so he can steal candy from babies full time. Once Mr. Burns retires, he wants to withdraw $100 million at the beginning of each year for 10 years from a special off-shore account that will pay 20% annually. In order to fund his retirement, Mr. Burns will make 15 equal end-of-the-year deposits in this same special account that will pay 20% annually. How large of an annual deposit must be made to fund Mr. Burns’ retirement plans?
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What is the PV of this uneven cash flow stream?
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