The difference in the value of a $5,000 annual perpetuity and an annuity of $5,000 for 100 years is $28.
What is meant by cash flows?
A cash flow is a physical or digital flow of funds:
- The phrase "cash flow" is typically used to represent payments that are projected to happen in the future, are thus unknown, and so need to be forecast using cash flows; a cash flow in its restricted sense is a payment (in a currency), especially from one central bank account to another;
- A cash flow's time t, nominal quantity N, currency CCY, and account A are what make it up; symbolically, CF = CF (t,N,CCY,A).
- However, it is common to use the term "cash flow" in a broader meaning to describe (symbolic) payments into or out of a company, project, or financial product.
The value of a sum of money today is known as its present value. For instance, if you are promised $110 in a year, the present value is what that $110 is currently worth.
The present value of the perpetuity is 5,000/0.08 = $62,500. For the annuity:
The difference = 62,500 - 62,472 = $28
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