Question

Shelton Enterprises is expecting tremendous growth from its newest boutique store. Next year the store is expected to bring in net cash flows of $675,000. The company expects its earnings to grow annually at a rate of 13 percent for the next 15 years. What is the present value of this growing annuity if the firm uses a discount rate of 18 percent on its investments? (Round to the nearest dollar.)

A. $5,478,320
B. $6,448,519
C. $6,750,000
D. $7,115,449

Answer 1

B. $6,448,519

Step-by-step explanation:

The computation of the present value of this growing annuity is given below:

PVA = [Cash flow at year 1 ÷ (interest rate - growth rate)] × {1 - [(1 + growth rate) ÷ (1 + interest rate)^number of years}

= [$675,000 ÷ (0.18 - 0.13)] × [1 - (1.13 ÷ 1.18)^15]

= $6,448,519

Hence, the correct option is b.