Question - Your boss as asked you to consider two possible scenarios presented to him by his Pension Advisor for consideration:
a. What is the present value of his perpetuity of $100 per year if his appropriate discount rate is 7 percent and what would that present value be if his discount rate were to change 14 percent due to the changes in the national economy. What would happen to the present value of his perpetuity?
b. He asked what would happen if he were to win the Virginia lottery of $35 million, where the state would pay him 20 annual payments of $1.75 million each beginning immediately. If the rate of return on securities of similar risk to the lottery earning (e.g., the rate on 20 year U.S. Treasury bonds) is 6 percent, what is the present value of his winnings?