Your Neighbor Owns a Perpetuity of $100 Per Year That

question 90

Multiple Choice

Your neighbor owns a perpetuity of $100 per year that has a discount rate of 6% per year.He offers to sell to you all but the next 20 cash flows (the first to be received one year from today) for $500.In other words,he keeps the first 20 cash flows of his perpetuity and you get all of the rest.Is this a good price for you if the appropriate discount rate is 6%?

• A)No,because the entire perpetuity is worth only $1,666.67 and your neighbor is taking the best cash flows worth more than $1,200 in present value terms
• B)Yes,because the present value of the remaining cash flows is $519.68 and you are buying them for only $500.
• C)No,because the cash flows you receive are only worth $482.16 and that is less than the $500 your neighbor is asking for the cash flows.
• D)This question cannot be answered.

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Definitions:

Logistics

The management of the flow of goods, information, and resources between the point of origin and the point of consumption in order to meet the requirements of customers or corporations.

Supply Chain Performance

An evaluation of how well a supply chain achieves its goals, often measured through metrics like efficiency, speed, cost, and reliability.

Time

The indefinite continued progress of existence and events in the past, present, and future regarded as a whole.

Quantity

The amount, size, or number of something, which can be measured or counted.