What values do I enter for N, PMT, i/y, FV and PV on a finance calculator to solve for the question below.

Question

If you are willing to pay $27,421.00 today to receive a perpetuity with the first payment occurring next year then the payment must be $______. Assume a 11.00% discount rate.

Answer 1

To determine the payment for the perpetuity, we can use the formula for the present value of a perpetuity:

\[ PV = \frac{PMT}{r} \]

Where:

• \( PV \) = Present Value
• \( PMT \) = Payment per period
• \( r \) = Discount rate (expressed as a decimal)

From the question, we know:

• \( PV = 27,421.00 \)
• \( r = 11.00% = 0.11 \)

We rearrange the formula to solve for \( PMT \):

\[ PMT = PV \times r \]

Substituting in the values we have:

\[ PMT = 27,421.00 \times 0.11 \]

Now, we just need to calculate it:

\[ PMT = 27,421.00 \times 0.11 = 3,016.31 \]

Now, to enter this into a finance calculator, you would typically set it up as follows:

• N (Number of periods): Not needed for perpetuity since it lasts forever.
• PMT: Calculate the value as 3,016.31 (this is what we're solving for).
• i/y (Interest rate): 11.00.
• FV (Future Value): 0 (not important for perpetuity).
• PV (Present Value): -27,421.00 (make sure to enter this as a negative value indicating a cash outflow).

The only output we are seeking is the payment \( PMT \), which you would have already calculated to be approximately $3,016.31.