Question

You are invited to participate in a new company. The company is projected to payout $10,000 in the first year, and after that the payouts will grow by an annual rate of 6 percent forever. If you can invest the cash flows at 8 percent, how much will you be willing to pay for this perpetuity

Answer 1

= $500,000

Step-by-step explanation:

Given:

• CF1= $10,000
• Growth rate of 6% = 0.06
• cash flows rate at 8 percent= 0.08

The amount you will be willing to pay for this perpetuity, apply the following formula:

PVP = CF1 / (i – g)

= $10,000 / (8% – 6%)

= $10,000 / (0.08 -0.06)

= $500,000

Hope it will find you well