Which of the Following Is True About Perpetuities

question 7

Multiple Choice

Which of the following is true about perpetuities?

• A) A perpetuity does not generate cash flows every period infinitely.
• B) Since a perpetuity generates cash flows every period infinitely, each cash flow must be discounted to calculate the present value.
• C) Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate.
• D) Since a perpetuity generates cash flows every period infinitely, there is no way to solve for the cash flow given the present value and the interest rate.

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Definitions:

Accounting Rate of Return

A financial ratio used to measure the profitability of an investment, calculated as the average annual profit divided by the initial investment cost.

After-Tax Net Income

The amount of money a company earns in a given period after all taxes have been deducted from gross income.

Net Present Value

A financial metric that calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time, used to assess the profitability of investments.

Future Cash Flows

The projected amounts of money expected to be received or paid out by an entity over future periods as a result of investment, operational, and financing activities.