Your annual salary is $100,000. You are offered two options for a severance package. Option 1...
Question:
Your annual salary is $100,000. You are offered two options for a severance package.
Option 1 pays you 6 months salary now.
Option 2 pays you and your heirs $6,000 per year forever first payment at the end of this year.
If your required return is 11% which option should you choose?
Perpetuity:
An annuity that lasts forever is called perpetuity. In the perpetuity, a fixed amount is received at the end of each period and the frequency of the payment is forever.
PV of the perpetuity = Periodic cash flow/ Interest rate
Answer and Explanation: 1
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View this answerWe need to determine the present value of both options. The option having the highest present value will be selected.
Option 1
In this option...
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Perpetuity Definition, Formula & Examples
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Chapter 6 / Lesson 4
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Learn what perpetuity is in finance. Understand the meaning and definition of perpetuity, its characteristics and how its present value can be found using a formula.
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