1.Consider a perpetuity paying $100 a year. If the interest rate is 10 percent, what is the PV of the perpetuity? If the rate were to increase would the value of the perpetuity increase or decrease?

PV = CF/r

$1,000.00 increase

$110.00 decrease

$1,000.00 decrease

2.Suppose you have an investment that will generate a cash flow of 100,000 dollars next year. Assume the cash flows will grow indefinitely at a rate of 5 percent and the relevant rate is 9 percent, What is the PV of this growing perpetuity?

PV= C/(r - g)

2,000,000.00

1,111,111.11

2,500,000.00

3.You have just won the state's million dollar lottery.You will receive 40,000 dollars per year for 25 years. 40,000 x 25 = 1,000,000.00, hence the million dollar lottery. If the interest rate is 8 percent, what is the true value of the lottery?

146,017.90

533,738.81

1,000,000.00