Question

(Present value of a growing​ perpetuity)  What is the present value of a perpetual stream of cash flows that pays ​$5500 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 15​%? What if the appropriate discount rate is 13​%? a.  If the appropriate discount rate is 15​%, the present value of the growing perpetuity is​ $ nothing. ​ (Round to the nearest​ cent.)

Answer 1

a) At 15%

Present Value of Growing Perpetuity = Cash flow in year 1 / (discount rate-growth rate)

= 5500/(.15-.02)

= 5500/.13

= $42,307.69

a) At 13%

Present Value of Growing Perpetuity = Cash flow in year 1 / (discount rate-growth rate)

= 5500/(.13-.02)

= 5500/.11

= $50,000.00