Question

Bryant Investments is putting out a new product. The product will pay out $32,000 in the first year, and after that the payouts will grow by an annual rate of 2.75 percent forever. If you can invest the cash flows at 7.25 percent, how much will you be willing to pay for this perpetuity? (Round to the nearest dollar.)

Answer 1

Answer:

Present Value= $711,111.11

Explanation:

Giving the following information:

Cash flow= $32,000

Growth rate= 2.75 percent forever.

Interest rate= 7.25 percent

To calculate the present value, we need to use the following formula for a perpetual annuity with growing rate:

PV= Cf/ (i - g)

g= growth rate

i= interest rate

PV= 32,000/ (0.0725 - 0.0275)

PV= $711,111.11