You are scheduled to receive an annual payment of $3,600 in oneyear. This payment will...

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?

Solutions

Expert Solution

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

jeff jeffy answered 2 years ago

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