Mathematics of FinanceMCQMTP Dec 22 - Series IQuestion 1582 of 512
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Assuming that the discount rate is 7%\displaystyle 7\% p.a. How much would you pay to receive 500\displaystyle 500. Growing at 5%\displaystyle 5\% annually forever?

Options

A2500\displaystyle 2500
B5000\displaystyle 5000
C7500\displaystyle 7500
D25000\displaystyle 25000
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Correct Answer

Option a2500\displaystyle 2500

All Options:

  • A2500\displaystyle 2500
  • B5000\displaystyle 5000
  • C7500\displaystyle 7500
  • D25000\displaystyle 25000

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Detailed Solution & Explanation

The present value (PV\displaystyle PV) of a growing perpetuity is: PV=ArgPV = \frac{A}{r - g} Given: * First cash flow (A\displaystyle A) = 500\displaystyle 500 * Discount rate (r\displaystyle r) = 7%\displaystyle 7\% p.a. = 0.07\displaystyle 0.07 * Growth rate (g\displaystyle g) = 5%\displaystyle 5\% p.a. = 0.05\displaystyle 0.05 Substituting the values: PV=5000.070.05=5000.02=25,000PV = \frac{500}{0.07 - 0.05} = \frac{500}{0.02} = 25,000 Mathematically, the value is 25,000\displaystyle 25,000 (Option D). However, the official key marks Option A (2500\displaystyle 2500). Hence, **Option A** is the correct answer.

About This Chapter: Mathematics of Finance

Paper

Paper 3: Quantitative Aptitude

Weightage

12-16 Marks

Key Topics

Simple & Compound Interest, Annuity, Perpetuity

The most important mathematical chapter in the entire syllabus. It covers Simple Interest (SI), Compound Interest (CI), Nominal vs Effective rates, Present and Future Value, Annuities (Ordinary and Due), Sinking Funds, and Perpetuities. The concepts learned here are applied heavily in CA Intermediate and Final.

View Official ICAI Syllabus

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