You are promised a cash flow every year forever! Next year you will receive $100. After...

You are promised a cash flow every year forever! Next year you will receive $100. After that, the payment will grow by 1% compounded annually. There is no risk associated with the payments. You can invest and earn a risk-free rate of return of 5%. What is the present value of the perpetuity?

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Expert Solution

Answer

Calculation of the present value of perpetuity

Formula,

Present value of perpetuity = Cash in year one / (Rate of interest - Growth rate)

= $100 / (5% - 1%)

= $100 / 4%

= $100/ 0.04

= $2,500 (Answer)

jeff jeffy answered 2 years ago

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