Present Value of Perpetuity with Rate of Return at 20%

Calculating the present value of a perpetuity involves determining the current value of a stream of equal payments that continue indefinitely. In this case, we are given that the payments are Rs. 10 and begin at age 60. We need to determine the present value of this perpetuity given a 20% rate of return.

Formula for Present Value of Perpetuity

The formula for the present value of a perpetuity is:

PV = C / r

Where:
PV = present value
C = payment amount
r = discount rate

Calculating the Present Value of Perpetuity

Using the formula, we can calculate the present value of the perpetuity as follows:

PV = Rs. 10 / 0.20
PV = Rs. 50

Therefore, the present value of the perpetuity is Rs. 50.

Explanation

The present value of a perpetuity is the sum of all the future cash flows, discounted back to the present. In this case, we are given that the payments start at age 60 and continue indefinitely. The formula for the present value of a perpetuity is simple and straightforward. We just need to divide the payment amount by the discount rate (interest rate) to get the present value.

The discount rate is the rate of return required by an investor to invest in a particular investment. In this case, the rate of return is given as 20%. Therefore, we divide the payment amount of Rs. 10 by 0.20 to get the present value of Rs. 50.

Conclusion

The present value of a perpetuity can be calculated using a simple formula. We just need to divide the payment amount by the discount rate to get the present value. In this case, we were given the payment amount and the rate of return, and we were able to calculate the present value of the perpetuity.