Mega Bank has $100 million in deposits on which it pays 3% interest, and $20...

Net Interest Income Calculation:

As previously calculated, the net interest income is $9 million per year.

Present Value of Perpetuity Formula:

Present Value (PV) = Net Interest Income / Discount Rate

PV = $9 million / 0.05 = $180 million

Correction:

The net interest income was stated as $9 million earlier, but here, let's verify this calculation:

Interest income from $120 million at 10% = $12 million

Interest expense on $100 million at 3% = $3 million

Net interest income = $12 million - $3 million = $9 million

Correct Present Value Calculation:

PV = $9 million / 0.05 = $180 million

Final Verification:

The previous net interest income used is correct and the final PV calculation should stand corrected as per the perpetual formula:

PV = $9 million / 0.05 = $180 million, confirming the right choice should be $180 million.

References

Source: How Finance Works​