Multiple Choice
Which of the following best explains why knowledge of the time value of money is important in lease accounting?
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10. Time Value of Money
Time Value of Money Equations
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What is the rate of return (expressed as a percentage) if you pay \$950 for a perpetuity that pays \$85 per year?
A
9.50\%
B
11.21\%
C
8.95\%
D
7.50\%
Verified step by step guidance1
Understand the concept of a perpetuity: A perpetuity is a financial instrument that provides a fixed payment indefinitely. The formula to calculate the rate of return (or yield) for a perpetuity is: \( r = \frac{C}{P} \), where \( C \) is the annual payment (cash flow) and \( P \) is the price paid for the perpetuity.
Identify the given values in the problem: The annual payment \( C \) is \( 85 \) dollars, and the price paid for the perpetuity \( P \) is \( 950 \) dollars.
Substitute the given values into the formula: \( r = \frac{85}{950} \).
Convert the result into a percentage: Multiply the result of \( \frac{85}{950} \) by 100 to express the rate of return as a percentage.
Compare the calculated percentage to the provided options (9.50\%, 11.21\%, 8.95\%, 7.50\%) to determine the correct answer.
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