The amount of money needed to ensure for a prize of ₹5000 at the begining of each year indefinitely if money is worth 5% compounded annually is:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → ₹1,05,000 **
The payment is ₹5000 at the beginning of each year forever.
This is a perpetuity due.
Present value of a perpetuity due:
$PV = \frac{R}{i}\,(1+i)$
Here:
$R = 5000$
$i = 0.05$
Compute:
$PV = \frac{5000}{0.05}\,(1.05)$
$PV = 100000 \times 1.05$
$PV = 105000$
Required amount = ₹105000