Question

Bryant Investing 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 csh flow at 7.25 percent how much will you be willing to pay for this perpetuity?

Answer 1

To determine the present value of a perpetuity with a cash flow growing at an annual rate, use the formula Present Value = Cash Flow / (Discount Rate - Growth Rate). In this case, the present value would be approximately $711,111.11.

To determine the present value of a perpetuity, we can use the formula:

Present Value = Cash Flow / (Discount Rate - Growth Rate)

In this case, the cash flow is $32,000 and the growth rate is 2.75%, so the formula becomes:

Present Value = $32,000 / (0.0725 - 0.0275)

Simplifying the equation, we get:

Present Value = $32,000 / 0.045 = $711,111.11

Therefore, you would be willing to pay approximately $711,111.11 for this perpetuity.