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To determine the amount ross must give the university

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Unformatted text preview: tor can CHAPTER 4 Time Value of Money 149 be found by dividing 1 by 0.10, as noted in Equation 4.17. Substituting the resulting factor, 10, and the amount of the perpetuity, PMT $200,000, into Equation 4.16 results in a present value of $2,000,000 for the perpetuity. In other words, to generate $200,000 every year for an indefinite period requires $2,000,000 today if Ross Clark’s alma mater can earn 10% on its investments. If the university earns 10% interest annually on the $2,000,000, it can withdraw $200,000 a year indefinitely without touching the initial $2,000,000, which would never be drawn upon. Review Questions 4–8 What is the difference between an ordinary annuity and an annuity due? Which always has greater future value and present value for identical annuities and interest rates? Why? 4–9 What are the most efficient ways to calculate the present value of an ordinary annuity? What is the relationship between the PVIF and PVIFA interest factors given in Tables A–2 and A...
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