What is the present value of a 400 perpetuity if the interes

What is the present value of a $400 perpetuity if the interest rate is 10%? Round your answer to the nearest cent. $ If interest rates doubled to 20%, what would its present value be? Round your answer to the nearest cent. $

Solution

present value of perpetuity=Annual flows/interest rate

At 10% interest rate:

present value=$400/0.1

=$4000.

At 20% interest rate:

present value=$400/0.2

=$2000.