Determine the annual discount rate

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Reference no: EM131903854

a) John is given the choice between two forms of compensation.

A: Receive $100,000 upfront.

B: Receive $60,000 at the end of this year and $60,000 at the end of the following year.

Determine the annual discount rate that would make the present value of these two options equal.

[Hint: Use trial and error with a calculator.

Try as many times as needed to get as close to the intended present value as you may need. Remember that higher discount rates (yields) lead to lower present values.

Another hint: Form A ($100K) is already in present value terms: no need to discount.

b) St Louis University (SLU) is soliciting donations to fund a $100,000-per-year perpetual professorship. The current available interest rate on SLU's money is 4% p.a.

Determine the amount of funds SLU needs today to fund the professorship.

(Hint: SLU must pay $100,000/year to the professor occupying that professorship.

Reference no: EM131903854

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