Question: you are evaluating an investment that will pay 80 in...
You are evaluating an investment that will pay $80 in 1 year, and it will continue to make payments at annual intervals thereafter, but the payments will grow by 5% forever.
a. What is the present value of the first $80 payment if the discount rate is 12%?
b. How much cash will this investment pay 100 years from now? What is the present value of the 100th payment? Again use a 12% discount rate.
c. What is the present value of the entire growing stream of perpetual cash flows?
d. Explain why the answers to parts a and b help to explain why an infinite stream of growing cash flows has a finite present value.