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Calculate the profitability index of investment

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Reference no: EM133090900

Question - A friend who owns a perpetuity that promises to pay £1,000 at the end of each year, forever, comes to you and offers to sell you all of the payments to be received after the 25th year for a price of £1,000.

Required -

(i) At an interest rate of 10%, should you pay the £1,000 today to receive payment numbers 26 and onwards?

(ii) What does this suggest to you about the value of perpetual payments?

(iii) Calculate the profitability index (PI) of investment.

(iv) What do you know about the investment's net present value (NPV) and its internal rate of return (IRR)?

Reference no: EM133090900

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