Question

An investment, which has an expected return of 15%, is expected to make annual cash flows forever. The first annual cash flow is expected today and all subsequent annual cash flows are expected to grow at a constant rate of 5% per year. The cash flow expected today is expected to be $20000. What is the present value (as of today) of the cash flow that is expected to be made in 9 years from today?

Answer 1

The First Cash flow - $20,000

Growth - 5%

So, Value of cash flow at the end of 9 year will be

Future Value = Initial Value ( 1 + Growth)^Number of year

= 20,000 (1+5%)^9

= 20000 (1.05)^9

= 31026.56

Now, The Value of cash flow that will be received at 9th year is $31026.356

So, To Calculate Present Value we will discount this by required return

Present Value = Future Value / (1 + Required return )^Number of years

= 31026.564 / (1+15%)^9

= 31026.564 / 3.51

= $8819.685

The present vaue of Cash flow of 9th period is 8819.685 (Approximately)