An investment promises to pay you $700 per year starting immediately. The cash flow from the...

An investment promises to pay you $700 per year starting immediately. The cash flow from the investment is expected to increase by 3 percent per year forever. If alternative investments of similar risk earn a return of 8 percent per year, determine the maximum you would be willing to pay for the investment. (Round answer to 2 decimal places, e.g. 125.12. Do not round your intermediate calculations.)

Solutions

Expert Solution

However, 'C' is the amount that is received next year (or in year 1)

C = $700 * (1 + 3%) = $721

PV = $14,420

Value you should be willing today = $14,420 + Amount received today = $14,420 + $700 = $15,120.

jeff jeffy answered 2 years ago

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