Question

w6 11/12 (Related to Checkpoint 6.5) (Present value of a growing perpetuity) What is the present value of a perpetual stream of cash flows that pays $2 comma 500 at the end of year one and the annual cash flows grow at a rate of 4% per year indefinitely, if the appropriate discount rate is 13%? What if the appropriate discount rate is 11%?

Answer #1

Present value of Growing perpetuity is = Annual cashflow/(Discount rate - Growth rate) | |||

Present value of Growing perpetuity is = (2500/(13%-4%)) | |||

Present value of Growing perpetuity is = (2500/9%) | |||

Present value of Growing perpetuity is = $ 27,777.78/. Approx. | |||

If discount rate is 11% | |||

Present value of Growing perpetuity is = (2500/(11%-4%)) | |||

Present value of Growing perpetuity is = (2500/7%) | |||

Present value of Growing perpetuity is = $ 35,714.29/. Approx. |

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A
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C
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