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Question: you are evaluating an investment that will pay 80 in...

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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.

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