A man wishes to ensure that he gets Rs. 75,000/- at the end of each year indefinitely. The amount that he invest now to produce the desired cash flow, if money is worth 2.5% compounded annually is:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Rs. 30,00,000
The required investment is the Present Value of a perpetuity:
$PV=\frac{C}{r}$
Here, $C=75000$, $r=\frac{2.5}{100}=\frac{1}{40}$
$PV=\frac{75000}{\frac{1}{40}}=75000 \times 40=3000000$
∴ The man must invest Rs. $30,00,000$