Which of the following are characteristics of a perpetuity? Check all that apply. The present value of a perpetuity is calculated by dividing the amount of the payment by the investor’s opportunity interest rate. The principal amount of a perpetuity is repaid as a lump-sum amount. A perpetuity continues for a fixed time period. A perpetuity is a series of regularly timed, equal cash flows that is assumed to continue indefinitely into the future. Your grandfather wants to establish a scholarship in his father’s name at a local university and has stipulated that you will administer it. As you’ve committed to fund a $15,000 scholarship every year beginning one year from tomorrow, you’ll want to set aside the money for the scholarship immediately. At tomorrow’s meeting with your grandfather and the bank’s representative, you will need to deposit _ (rounded to the nearest whole dollar) so that you can fund the scholarship forever, assuming that the account will earn 4.50% per annum every year. Oops! The bank representative just reported that he misquoted the available interest rate on the scholarship’s account. Your account should earn 7.00%. The amount of your required deposit should be revised to__. This suggests there is (an inverse / a direct) relationship between the interest rate earned on the account and the present value of the perpetuity.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 12EB: Your friend has a trust fund that will pay her the following amounts at the given interest rate for...

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Which of the following are characteristics of a perpetuity? Check all that apply.

The present value of a perpetuity is calculated by dividing the amount of the payment by the investor’s opportunity interest rate.
The principal amount of a perpetuity is repaid as a lump-sum amount.
A perpetuity continues for a fixed time period.
A perpetuity is a series of regularly timed, equal cash flows that is assumed to continue indefinitely into the future.

Your grandfather wants to establish a scholarship in his father’s name at a local university and has stipulated that you will administer it. As you’ve committed to fund a $15,000 scholarship every year beginning one year from tomorrow, you’ll want to set aside the money for the scholarship immediately. At tomorrow’s meeting with your grandfather and the bank’s representative, you will need to deposit ___________ (rounded to the nearest whole dollar) so that you can fund the scholarship forever, assuming that the account will earn 4.50% per annum every year.

Oops! The bank representative just reported that he misquoted the available interest rate on the scholarship’s account. Your account should earn 7.00%. The amount of your required deposit should be revised to____________. This suggests there is (an inverse / a direct) relationship between the interest rate earned on the account and the present value of the perpetuity.

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