Question

Find the present value of a string of equal annual cash flows that makes its first $10,000 payment 8 years from today and continues making $10,000 payments each year forever. The interest rate is 6.8%

Answer 1

PV= $86,880.25

Step-by-step explanation:

First, we need to calculate the present value of the perpetual annuity 8 years from now. We will use the following formula:

PV= Cf/ (i - g)

Cf= $10,000

i= 0.068

g= 0

PV= 10,000 / 0.068

PV= $147,058.82

Now, the present value today:

PV= FV/(1+i)^n

FV= 147,058.82

i= 0.068

n= 8

PV= 147,058.82 / (1.068^8)

PV= $86,880.25