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

Answer 1

PV= $711,111.11

Step-by-step explanation:

Giving the following information:

Cash flow (Cf)= $32,000

Annual growth (g)= 2.75%

Interest rate (i)= 7.25%

To calculate the present value (the amount that you are willing to pay), we need to use the following formula:

PV= Cf / (i - g)

PV= 32,000 / (0.0725 - 0.0275)

PV= $711,111.11