An Annuity and Ye Olde BA II Plus Business Calculator
For example’s sake, let’s say you can purchase a coin operated laundry machine business for $80,000 outright or you can make installment payments of 10,000 a year for 10 years. Which is the better deal? If the discount rate is 8%, we would break out our hand BA II Plus business calculator and enter the digits as follows:
P/Y = 1
N = 10
I/Y = 8
PMT = $10,000
CPT PV
The result is $67,101. Thus, it would be wiser to take the installment payment deal and use the rest to stock up the detergent dispensers with Tide.
A Perpetuity Goes on Forever, Just Like the Peter Frampton Song Do You Feel Like We Do
To find the present value of a perpetuity, you simply divide the annual payment by the interest rate. For example, a bond that pays a $50 coupon each year with an interest rate of 10 percent has a present value of $500.
PV = $50 / .10 = $500
Mark A. White provides us with a very interesting example of a perpetuity in his workbook, Financial Analysis With an Electronic Calculator: “Former US President John F. Kennedy’s grave in Arlington Cemetery is marked by an ‘eternal flame,’ which has burned continuosly since his assassination in 1963. Suppose that annual fuel expenses were estimated at $1,200 per year, and the annual interest rate at that time was 5 percent. How much should this portion of the monument have cost at the time of its construction?”[i]
Answer = $24,000
PV = $1,200 / .05
[i] Financial Analysis With an Electronic Calculator, Mark A. White, Fourth Edition, McGraw Hill, 2000, p30
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