Would you rather receive $1,000 today or $100 every year into perpetuity?

Question

IBPrep · Accepted Answer

Depends on the discount rate. PV of a perpetuity = Cash Flow / Rate = $100 / r. Set equal to $1,000: $100/r = $1,000 → r = 10%. If your discount rate is less than 10%, take the $100/year perpetuity (worth more than $1,000 in PV). If greater than 10%, take the $1,000 today. At exactly 10%, you're indifferent.

Would you rather receive $1,000 today or $100 every year into perpetuity?

Answer

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