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What is the present value of a perpetual stream of cash flows that pays ​$5 comma...

What is the present value of a perpetual stream of cash flows that pays ​$5 comma 500 at the end of year one and the annual cash flows grow at a rate of 3​% per year​ indefinitely, if the appropriate discount rate is 14​%? What if the appropriate discount rate is 12​%?

a.If the appropriate discount rate is 14​%, the present value of the growing perpetuity is​ $_____. ​ (Round to the nearest​ cent.)

b.If the appropriate discount rate is 12​%, the present value of the growing perpetuity is​ $ _____. ​ (Round to the nearest ​ cent.)

Solutions

Expert Solution

Present value of perpetuity=Cash flow for year 1/(Discount rate-Growth rate)

1.Present value=5500/(0.14-0.03)

which is equal to=$50,000

2.Present value=5500/(0.12-0.03)

which is equal to=$61,111.11(Approx).

jeff jeffy answered 2 years ago
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