Question

An investment opportunity has just paid a cash flow of $4,920. The cash flow from this investment is expected to grow at a constant growth rate of 6% for its expected life of 35 years. What is the fair value of this opportunity today if its required rate of return is 9%?

Answer 1

Future value of cash flow if it grows at 6%

Future value = Present value * ( 1+Interest rate)^Number of period

= 4920*(1+6%)^35

= 4920 *(1.06)^35

= 4920 * 7.68608679231

= 37815.5470182

Now, We will calcualte the present value using Required return 9%

Present value = Future value / ( 1+Interest rate)^Number of period)

= 37815.5470182 / (1+9%)^35

=  37815.5470182 / (1.09)^35

= 37815.5470182 / 20.4139679185

= 1852.43491952

So, The fair value of this opportunity is $1852.43491952