Question

What is the present value of a perpetual stream cash flows that pays $4000 at the end of year one and the annual cash flows grow at a rate of 2% per year indefinitely, if the appropriate discount rate is 11%? What if the appropriate disscount rate is 9%?

A) If the appropriate discount rate is 11%, the present value of the growing perpetuity is $_____? (Round to nearest cent)

B) If the appropriate discount rate is 9%, the present value of growing perpetuity is $_____? (Round to nearest cent)

Answer 1

A) If the appropriate discount rate is 11%, the present value of the growing perpetuity is $44,444.44 (Round to nearest cent)

Present value of growing perpetuity = Cash flow / (Discount rate - Growth rate)

Present value of growing perpetuity =$4000 / (11%-2%)

Present value of growing perpetuity = $44,444.44

B) If the appropriate discount rate is 9%, the present value of growing perpetuity is $57,142.86 (Round to nearest cent)

Present value of growing perpetuity = Cash flow / (Discount rate - Growth rate)

Present value of growing perpetuity =$4000 / (9%-2%)

Present value of growing perpetuity = $57,142.86