Question

An investment, which has an expected return of 10.65 percent, is expected to make annual cash flows forever. The first annual cash flow is expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate of 5.63 percent per year. The cash flow in 1 year from today is expected to be 19,250 dollars. What is the present value (as of today) of the cash flow that is expected to be made in 5 years?

Answer 1

Answer:
Calculation of Present value.
Year	Cash flow formula	Cash flows	Present value factor @10.65%	Present value
1	=19,250	19250.00	0.9038	17397.20
2	=19250x(1+0.0563)	20333.78	0.8168	16607.92
3	=20333.78x(1+0.0563)	21478.57	0.7382	15854.44
4	=21,478.57x(1+0.0563)	22687.81	0.6671	15135.16
5	=22687.81*(1+0.0563)	23965.13	0.6029	14448.50
			Total	79443.22
Present value of cash flows in 5 years is $79,443.22 (Answer)