A sweepstakes winner may select either a perpetuity of £2,000 a month beginning with the first payment in one month or an immediate lump sum payment of £350,000. If the annual discount rate is 6% compounded monthly,
the present value of the perpetuity is:
less than the lump sum.
equal to the lump sum.
greater than the lump sum.
C is correct. As shown below, the present value (PV) of a £2,000 per month perpetuity is worth approximately £400,000 at a 6% annual rate compounded monthly. Thus, the present value of the annuity (A) is worth more than the lump sum offer.
A = £2,000
r = (6%/12) = 0.02
PV = (A/r)
PV = (£2,000/0.02) PV = £400,000
MY Question : I know the formula but how did they reach to 400,000 from 2000/.02 . It should be 100,0000
Please help
