Question

What is the value of receiving $4,000 per month forever, the first cash flow starting in one month, if the discount rate is a 3% monthly compounded APR? What if the discount rate is an annually compounded 3%?

Answer 1

a.	Value of cash flow	=	Monthly Cash flow	/	Monthly Interest rate
		=	$                4,000	/	0.0025
		=	$       1,600,000
	Working:
	Monthly Interest rate	=	3%	/	12
		=	0.0025
b.	Value of cash flow	=	Monthly Cash flow	/	Monthly Interest rate
		=	$                4,000	/	0.002466
		=	$       1,621,883
	Working:
	Equivalent monthly interest rate is calculated as follows:
	(1+i)^n	=	(1+i)^n
	(1+i)^12	=	(1+0.03)^1
	(1+i)^12	=	1.03
	1+i	=	1.03	^(1/12)
	1+i	=	1.00246627
	i	=	0.00246627