PRC-2 · Chapter 5 · Question 5 of 50
A university foundation establishes a fund with Rs. 800,000 invested. This fund is designed to provide a perpetual payment of Rs. 40,000 at the end of each year forever. What is the implied annual interest rate being earned?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 5%
Explanation
The present value of a perpetuity formula is PV = R / i. Rearranging to solve for the interest rate gives i = R / PV. Therefore, i = 40,000 / 800,000 = 0.05, or 5%.
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