Question

Sunland 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 $93,580 last year, and the current owners expect an annual growth rate of 6.3 percent. If Sunland Energy uses a discount rate of 13.6 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.)

Please explain answer in detail. Thank you.

Answer 1

Answer:

Calculation of present value:

Growth rate=6.3% or 0.063

Discount rate=13.60% or 0.136

Last year cash flow=$93,580

Present value=[Last year Cash flow(1+Growth rate)]/(Discount rate-Growth rate)

=[$93,580(1+0.063)]/(0.136-0.063)

=$99,475.54/0.073

=$1,362,678.63