Question

What value do I put for PMT, PV, N, and i/y for the question below to solve on a finance calculator?

What is the value today of receiving $2,181.00 per year forever? Assume the first payment is made next year and the discount rate is 9.00%.

Answer 1

To determine the present value (PV) of receiving an annuity that continues indefinitely (a perpetuity), you can use the following formula:

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

Where:
- \( PV \) = Present Value
- \( PMT \) = Payment received per period
- \( i \) = Interest rate (discount rate)

In your case:
- The annual payment \( PMT \) is $2,181.00.
- The discount rate \( i \) is 9.00% or 0.09.

Since this is a perpetuity, you don't have a specific time period, so \( N \) (the number of periods) won't apply in the traditional sense. Instead, you'll just be calculating the present value based on the annual payment and discount rate.

To summarize for input into a financial calculator:
- **PMT:** $2,181.00
- **PV:** Calculate this value to find the present value.
- **N:** Not applicable (you can leave this blank or enter forever, depending on the calculator).
- **i/y:** 9.00%

To complete the calculation:

\[
PV = \frac{2181}{0.09} = 24,233.33
\]

The present value of receiving $2,181.00 per year forever at a discount rate of 9% is $24,233.33.