Question

What is the present value of a perpetual stream of cash flows that pays $1,500 at the end of year one and the annual cash flows grow at a rate of 3% per year indefinitely, if the appropriate discount rate is 14%? What if the appropriate discount rate is 12%?

A. If the appropriate discount rate is 14%, the present value of the growing perpetuity is?

(Round to the nearest cent.)

Answer #1

**Calculation of PV
(Present Value ) Of PERPETUAL GROWING
CASH FLOWS :**

*(using Geometric Progression i.e
)*

*we get,*

**The above Given formulae of PV can be used directly
also.*

[where,

PV = Present Value of growing Perpetuity

CF = Cash Flow at the end of year 1

r = Discount rate

g = Growth rate ]

**A.**
**AT DISCOUNT RATE = 14%**

PV = 13636.36363636 or = **$
13636.36**

**B.**
**AT DISCOUNT RATE = 12%**

PV = 16,666.666666 or = **$
16,666.67**

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cash flows
discount rate
0
5%
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