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11

Finance

11. ?(Present value of a growing? perpetuity)  What is the present value of a perpetual stream of cash flows that pays ?$6,500 at the end of year one and the annual cash flows grow at a rate of 2?% per year? indefinitely, if the appropriate discount rate is 11?%? What if the appropriate discount rate is 9?%?

A)  If the appropriate discount rate is 11?%, the present value of the growing perpetuity is? $ (Round to nearest cent)

B) If the appropriate discount rate is 9%, the present value of the growing perpetuity is $ (Round to nearest cent)

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A). Computation of the present value of growing perpetuity:-

Present value of perpetuity = Cash flow for year 1 / (Discount rate - Growth rate)

= $6,500 / (11% - 2%)

= $6,500 / 9%

= $72,222.22 Or $72,222

 

B). Computation of the present value of growing perpetuity:-

Present value of perpetuity = Cash flow for year 1 / (Discount rate - Growth rate)

= $6,500 / (9% - 2%)

= $6,500 / 7%

= $92,857.14 Or $92,857

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