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.)
Calculation of PV (Present Value ) Of PERPETUAL GROWING CASH FLOWS :
(using Geometric Progression i.e )
*The above Given formulae of PV can be used directly also.
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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