Question

NBN Co will invest in an asset to fund its future purchase of copper wires. This asset is currently trading at $1,835,000. It is expected to generate a monthly cash flow forever that grows at a constant rate of 8% p.a. compounded monthly. The expected cost of capital is 10% p.a. compounded annually. How much would the first cash flow be from such an asset?

Group of answer choices

$2,685.41

$2,399.21

$2,559.62

$2,763.16

$2,489.87

Mr Johnie Depp was awarded a damages payout of $5 million in three months' time plus another $3.5 million in five months' time. What single amount today is equivalent to these payments if the appropriate interest rate is 8% p.a. compounded daily?

Group of answer choices

$8,165,580.67

$8,396,362.50

$8,695,369.18

$8,286,272.82

$8,592,365.85

Answer 1

NBN Co.
We know that the PV of a perpetual Annuity
with constant growth rate is given by the
formula ;
PV =D1/(k-g)
Where D1 is the first cash flow ??
k= cost of capital =10% pa =0.833% per month
g=8% pa compunded monthly.
EAR of g=(1+8%/12)^12-1=8.3% pa=0.692% per month
PV =$1,835,000
so, 1835000=D1/(0.833%-0.692%)
D1 =$2587.35
So first cash flow should be $2587.35 which is
nearest to $2,559.62
So Correct option is $2,559.62
Mr Johnie Depp
Interest rate =8% pa compounded daily
EAR =(1+8%/365)^365-1=8.328% pa
First payment is $5 M in 3 months
so PV of the first payment =5000000/(1.08328)^(3/12)=	$       4,901,001
Second payment is $3.5M in 5 months
So PV of second payment=3,500,000/(1.08328)^(5/12)=	$       3,385,266
So PV of both payments together =	8,286,267
Nearest option is $8,286,272.82
So the single payment today equivalent to those
damages payable =$8,286,272.82