An Annuity That Lasts Forever An annuity in perpetuity is one that continues
forever. Such annuities
are useful in setting up scholarship funds to ensure that the award continues.
(a) Draw a time line (as in Example 1 ) to show that to set up an annuity in
perpetuity of amount \(R\) per time period, the amount that must be invested now
is
$$
A_{p}=\frac{R}{1+i}+\frac{R}{(1+i)^{2}}+\frac{R}{(1+i)^{3}}+\cdots+\frac{R}{(1+i)^{n}}+\cdots
$$
where \(i\) is the interest rate per time period.
(b) Find the sum of the infinite series in part (a) to show that
$$
A_{p}=\frac{R}{i}
$$
(c) How much money must be invested now at 10\(\%\) per year, compounded
annually, to provide an annuity in perpetuity of \(\$ 5000\) per year? The first
payment is due in one year.
(d) How much money must be invested now at 8\(\%\) per year, compounded
quarterly, to provide an annuity in perpetuity of \(\$ 3000\) per year? The
first payment is due in one year.