Alice's investment advisor is trying to convince her to purchase an investment that pays $250 per year. The investment has no maturity; therefore the $250 payment will continue every year forever. Alice has determined that her required rate of return for such an investment should be 14 percent and that she would hold the investment for 10 years and then sell it. If Alice decides to buy the
investment, she would receive the first $250 payment one year from today. How much should Alice be willing to pay for this investment?
A) $1,304.03, because this is the present value of an ordinary annuity that pays $250 a year for 10 years at 14 percent.
B) $1,486.59, because this is the present value of an annuity due that pays $250 a year for 10 years at 14 percent.
C) $1,785.71, because this is the present value of a $250 perpetuity at 14 percent.
D) There is not enough information to answer this question, because the selling price of the investment in 10 years is not known today.
E) None of the above is correct.
C
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