Question

In: Finance

What is the present value of a perpetual stream of cash flows that pays $3,500 at...

What is the present value of a perpetual stream of cash flows that pays $3,500 at the end of year one and the annual cash flows grow at a rate of 4​% per year​ indefinitely, if the appropriate discount rate is 8​%? What if the appropriate discount rate is 6​%?

Q). a. If the appropriate discount rate is 8​%, the present value of the growing perpetuity is __ (Round to the nearest cent)

​ Please show your work.

Solutions

Expert Solution

a. If the appropriate discount rate is 8​%, the present value of the growing perpetuity is $     87,500.00
Working:
As per discounted cash flow method,
Present value of cash flow = D1/(Ke-g) Where,
= 3500/(8%-4%) D1 Cash flow at the end of year 1 $       3,500
= $     87,500.00 Ke Discount rate 8%
g Growth rate 4%
b. If the appropriate discount rate is 6​%, the present value of the growing perpetuity is $ 1,75,000.00
Working:
As per discounted cash flow method,
Present value of cash flow = D1/(Ke-g) Where,
= 3500/(6%-4%) D1 Cash flow at the end of year 1 $       3,500
= $ 1,75,000.00 Ke Discount rate 6%
g Growth rate 4%

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