Your friend promises you a perpetuity of paying you some money forever.If the first payment is at year 2, the first payment is $10 and PV0 for this perpetuity is $150, what is the interest rate?

Question

The friend is paying money yearly. Please help me decide which formula to use and clear steps to take. Thanks!

Answer 1

Annuity immediate formula for perpetuity will get present value at time = 1 and the it has to be discounted by 1+i to time = 0

10(1/i)(1/1+i) = 150

10/150 = i + i²

Solve Quadratic equation.

i² + i - 1/15 = 0

i = 0.0627 or i = -1.0627

i is positive and is interest rate .0627