Question

Bryant Investments 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 cash flows at 7.25 percent, how much will you be willing to pay for this perpetuity? (Round to the nearest dollar.)

A) $721,111
B) $633,111
C) $531,111
D) $711,111

Answer 1

The present value of the perpetuity is $711,111.

Step-by-step explanation:

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

PV = C / r

Where PV is the present value, C is the cash flow, and r is the discount rate. In this case, the cash flow starts at $32,000 and grows at a rate of 2.75% per year forever. The discount rate is 7.25%. Plugging these values into the formula:

PV = 32,000 / (0.0725 - 0.0275)

PV = 32,000 / 0.045

PV = $711,111 (rounded to the nearest dollar)

Therefore, the answer is D) $711,111.