Question

Wildhorse Energy Company owns several gas stations. Management is looking to open a new station in the western suburbs of Baltimore. One possibility that managers at the company are evaluating is to take over a station located at a site that has been leased from the county. The lease, originally for 99 years, currently has 73 years before expiration. The gas station generated a net cash flow of $95,710 last year, and the current owners expect an annual growth rate of 6.3 percent. If Wildhorse Energy uses a discount rate of 14.6 percent to evaluate such businesses, what is the present value of this growing annuity? (Round factor values to 6 decimal places, e.g. 1.521253 and final answer to 2 decimal places, e.g. 15.21.)

Present value

Answer 1

present value of growing annuity = (P / (r-g)) *[1 - (1+g / 1+r)^n]

P =cash inflow first year = $95,710*(1+g)= $101,739.73

r = discount rate=14.6%

g=growth rate =6.3%

n= number of years =73

present value of growing annuity = ($101,739.73 /(14.6%-6.3%)) *[1- (1+6.3% / 1+14.6%)^73]

($101,739.73 / 0.083) *[1 - (1.063 / 1.146)^73]

1,225,779.9*0.9958652

1220711.56

the present value of growing annuity is $1,220,711.56