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

Question

Rachael Lambert

Business

3 August, 12:54

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

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Answers (1)

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Blaine Craig · Answer 1

= $500,000

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