In: Finance
An investment, which has an expected return of 9.5%, 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 2.5% per year. We know that the cash flow expected in 1 year from today is expected to be $5,400. What is the present value (as of today) of the cash flow that is expected to be made in 3 years from today?
CF1 = 5400
CF2 = 5400*(1+0.025) = 5535
CF3 = 5535*(1+0.025) = 5673.375
PRESENT VALUE OF CF3 = CF3/(1+r)^3 = 5673.375/(1+0.095)^3 = 4321.15
Answer : 4321.15