Final answer:
To calculate the present value of a consol that starts paying $120 after 9 years with a 9% discount rate, use the perpetuity present value formula adjusted for the delayed start, resulting in an approximate current value of $577.56.
Step-by-step explanation:
The subject at hand is a consol or perpetuity which will start paying $120 at the end of 9 years. To find the present value of the consol given a discount rate of 9%, we need to apply the formula for the present value of a perpetuity. This formula is PV = C / r, where PV is the present value, C is the cash flow per period, and r is the discount rate. However, since the payments start after 9 years, we must also account for the delay, which means calculating the present value in 9 years and then discounting that value back to today. The perpetuity value in 9 years would be PV9 = 120 / 0.09 = $1,333.33. We then need to discount this value back to the present value using PV = FV / (1 + r)n, where FV is the future value (the perpetuity value in 9 years), r is the discount rate, and n is the number of years until the first payment. The formula becomes PV = $1,333.33 / (1 + 0.09)9. The calculation results in a present value of approximately $577.56. This answer shows how to employ the present value formula, similar to the present value operations shown in Table C2 for a simple two-year bond.