In: Finance
You are scheduled to receive an annual payment of $3,600 in one year. This payment will increase by 4% annually forever (you are going to receive the payments at the end of each year forever). The discount rate is 10 percent. What is the present value of these cash flows?
Annual payment received in 1 year (CF1) = 3600
growth rate forever or constant growth rate (g) =4%
discount rate (i) = 10%
Present value of these cash flows formula as per constant growth model = CF1/(i-g)
=3600/(10%-4%)
=60000
So present value of these cash flows is $60000