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An investment, which has an expected return of 9.5%, is expectedto make annual cash flows...

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?

Solutions

Expert Solution

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

jeff jeffy answered 2 years ago
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