Present Value of a Perpetuity A perpetuity pays 260 per year

Present Value of a Perpetuity A perpetuity pays $260 per year and interest rates are 6.6 percent. How much would its value change if interest rates increased to 9.1 percent?

Solution

Present Value of a Perpetuity=annual inflows/interest rate

1.Present Value of a Perpetuity=(260/0.066)=$3939.39(Approx)

2.Present value=$260/0.091=$2857.14

Hence value would decrease by=(3939.39-2857.14)=$1082.25(Approx).