10. Perpetuities

Perpetuities are also called annuities with an extended or unlimited life. Based on your understanding of perpetuities, answer the following questions.

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

The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows.

The value of a perpetuity cannot be determined.

A perpetuity is a stream of regularly timed, equal cash flows that continues forever.

The value of a perpetuity is equal to the sum of the present value of its expected future cash flows.

Your grandfather wants to establish a scholarship in his fathers name at a local university and has stipulated that you will administer it. As youve committed to fund a $5,000 scholarship every year beginning one year from tomorrow, youll want to set aside the money for the scholarship immediately. At tomorrows meeting with your grandfather and the banks 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 scholarships account. Your account should earn 7.00%. The amount of your required deposit should be revised to . This suggests there is relationship between the interest rate earned on the account and the present value of the perpetuity.