Question

Calculate the present value of $1 million paid at the end of every year in perpetuity,

assuming a rate of return of 10% and a constant growth rate of 6%.

Answer 1

Answer-

Given

Cash flow = $ 1 million

Discount rate or rate of return = r = 10 % = 0.10
Growth rate = g = 6 % = 0.06

Present value of a growing perpetuity = Cash flow / ( r - g)

Present value of a growing perpetuity = $ 1 million / ( 0.10 - 0.06)

Present value of a growing perpetuity = $ 1 million / 0.04

Present value of a growing perpetuity = $ 25 millions