Homework Answers
present value of annual perpetual cash flow =
we have to find out first present value of effective annual rate of every 2 years
(1+0.07)2 - 1 = 0.1449 = 14.49%
To make sum easy, we find one year future value of 50 = 50*(1+0.07) = 53.5
now 53.5 is receivable at the end of 2nd year
so total amount receivable at the end of 2nd year = 53.5 + 80 = 153.5
to get the answer, we have to find perpetual value of above cashflows
As amount is receivable at the end of 2nd, 4th and so on
we have to use effective annual rate of 2 years = 14.49% (as calculated above)
perpetual value = Amount/Rate
PERPETUAL VALUE = 153.5/0.1449 = 1059.35
ANSWER : $1059.35 (THUMBS UP PLEASE)
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