Question

Lily is receiving 40,000 at the end of each year for the rest of her life. Using a rate of 8% p.a; how much is her cash flow worth today?

Option 1: $500,000
Option 2: $40,000
Option 3: $5,000

Answer 1

To calculate how much Lily's cash flow is worth today, we need to use present value calculations. Lily is receiving $40,000 at the end of each year for the rest of her life. The present value of Lily's cash flow today is $500,000(Option 1).

Step-by-step explanation:

To calculate how much Lily's cash flow is worth today, we need to use present value calculations. Present value is the current value of a future cash flow, taking into account the time value of money. We can use the formula: PV = CF / (1+r)t, where PV is the present value, CF is the cash flow, r is the interest rate, and t is the number of years.

In this case, Lily is receiving $40,000 at the end of each year for the rest of her life. The interest rate is 8% per year. Since the cash flow is recurring and lasts indefinitely, we can use the formula for the present value of a perpetuity: PV = CF / r.

So, the present value of Lily's cash flow today is $40,000 / 0.08 = $500,000.