Final answer:
The price you should be willing to pay for this financial instrument is $6,313.
Step-by-step explanation:
When calculating the price one should be willing to pay for a financial instrument with perpetual cash flows that grow annually, the Gordon Growth Model or a perpetuity formula with growth can be used. In your case, where the financial instrument paid $626 last year and cash flows are expected to grow at 1.7% annually, while using a 9.9% discount rate, the formula to apply is the present value of a growing perpetuity: Price = Cash Flow / (Discount Rate - Growth Rate).
The price you should be willing to pay for this financial instrument can be calculated using the present value formula. Since the cash flow is expected to last forever and increase at a rate of 1.7 percent annually, we can represent it as a perpetuity. The present value of a perpetuity can be calculated using the formula:
Price = Cash Flow / Discount Rate
In this case, the cash flow is $626 and the discount rate is 9.9 percent. Plugging in these values, we get:
Price = $626 / 0.099 = $6,313
Therefore, the price you should be willing to pay for this financial instrument is $6,313.