In: Finance
Blossom Energy Company owns several gas stations. Management is looking to open a new station in the western suburbs of Baltimore. One possibility that managers at the company are evaluating is to take over a station located at a site that has been leased from the county. The lease, originally for 99 years, currently has 73 years before expiration. The gas station generated a net cash flow of $91,570 last year, and the current owners expect an annual growth rate of 6.3 percent. If Blossom Energy uses a discount rate of 13.2 percent to evaluate such businesses, what is the present value of this growing annuity? (Round factor values to 6 decimal places, e.g. 1.521253 and final answer to 2 decimal places, e.g. 15.21.)
Present value | $ |
You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $19,400 at the end of this year and subsequent payments that will grow at a rate of 2.6 percent annually. If you use a 9 percent discount rate for investments like this, what is the present value of this growing perpetuity? (Round answer to 2 decimal places, e.g. 15.25.)
Present value | $ |
PV of Growing Annuity = [First Payment/(r-g)] * [1 - {(1 + g)/(1 + r)}n]
1). PV of Growing Annuity = [{$91,570*(1+0.063)} / (0.132 - 0.063)] * [1 - {(1 + 0.063) / (1 + 0.132)}73]
= [$97,338.91 / 0.069] * [1 - (0.9390)73]
= $1,410,708.84 * [1 - 0.0101]
= $1,410,708.84 * 0.9899
= $1,396,400.92
2). PV of Growing Annuity = First Payment/(r-g)
= $19,400 / (0.09 - 0.026)
= $19,400 / 0.064
= $303,125