Final Answer:
I would be willing to pay $76,394.37 for an investment that promises to pay $10,826.00 a year forever with the first payment starting one year from now, given a required rate of return of 14.2%.
Step-by-step explanation:
To determine the maximum amount I would pay for this perpetual investment, we can use the Gordon Growth Model (also known as the Dividend Discount Model for perpetuities). The formula is:
Maximum Price = Dividend/Required Rate of Return
In this case:
Maximum Price= $10,826.00/0.142
Calculating this gives us the maximum price of $76,394.37. This amount represents the present value of an infinite series of future cash flows, considering the specified required rate of return.
Investors use the required rate of return to assess the attractiveness of an investment. A higher required rate of return reflects a higher level of risk or opportunity cost. In this scenario, a 14.2% required rate of return indicates that the investor expects a return commensurate with the perceived risk or foregone opportunities elsewhere.
In summary, the most I would pay for this perpetual investment is $76,394.37, as determined by the Gordon Growth Model and influenced by the 14.2% required rate of return.