(Manually Calculate) A newspap

(Manually Calculate) A newspaper costs \$1.00 a day. The interestrate is 6% annually, compounded daily.

a. If the newspapers’ price never changed, what should thenewspaper charge for a lifetime subscription assuming you will livefor 50 years?

b. What should it charge if you can pass on the subscription toyour descendants and they can continue to do the same inperpetuity?

c. What should it charge for a perpetual subscription if thenewspaper expects to raise its price by 4% annually (assume dailyinflation is 1/365 the annual rate)?

We have:

Daily cost (Pmt) = \$1

R= 6%

M= 365

Part A

Here we need to calculate the present value of daily costs.

N= 50 x365 = 18250

r= 6%/365

pmt = \$1

we have following formula for PV:

Therefore, Newspaper charge for life subscription would be\$5,780.39.

Part B

We have

r= 0.06/365

Pmt = \$1

PV of perpetuity = pmt/r

= 1/(0.06/365)

= 6083.33

Part C

r= 0.06/365

g= 0.04/365

pmt =1

PV of growing perpetuity = Pmt/ (r-g)

= 1/(0.06/365 -0.04/365)

= \$18250

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