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29 January, 01:54

What is the present value of a perpetual stream of cash flows that pays $8 comma 0008,000 at the end of year one and the annual cash flows grow at a rate of 44 % per year indefinitely, if the appropriate discount rate is 1515 %? What if the appropriate discount rate is 1313 %?

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  1. 29 January, 05:10
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    Instructions are listed below.

    Explanation:

    Giving the following information:

    Cash flows = $8,000

    Grow at a rate of 4 % per year indefinitely.

    We need to find the present value using the following formula:

    Present Value = periodic payment / (i - g)

    i = interest rate

    g = growth rate

    A) Interest rate = 15%

    PV = 8,000 / (0.15 - 0.04) = $72,727.27

    B) i = 13%

    PV = 8,000 / (0.13 - 0.04) = $88,889
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