What is the present value of a perpetual stream of cash flows that pays $1000 at the end of year one and the annual cash flows grows at a rate of 4% per year indefinitely, if the appropriate discount rate is 8%?

(Present value on a growing perpetuity). What is the present value of a perpetual stream of cash flows that pays $1000 at the end of year one and the annual cash flows grows at a rate of 4% per year indefinitely, if the appropriate discount rate is 8%? What if the appropriate discount rate is 6%?

a). If the appropriate discount rate is 8%, the present value of the growing perpetuity is? $ (round to the nearest cent)

b). If the appropriate discount rate is 6%, the present value of the growing perpetuity is? $ (round to the nearest cent)

Solutions

Expert Solution

Present value of perpetuity=Cash flow at end of year one/(Discount rate-Growth rate)

a.Present value of perpetuity=1000/(0.08-0.04)

=$25,000

b.Present value of perpetuity=1000/(0.06-0.04)

=$50,000

jeff jeffy answered 1 year ago

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