You have two assets and must calculate their values today based on their payment streams and required returns. Asset 1 has a required return of 1212 % and will produce a stream of $700700 starting at year 1 and continuing indefinitely. Asset 2 has a required return of 1111 % and will produce an end-of-year cash flow of $1 comma 4001,400 in 1 year, $ 1 comma 300$1,300 in 2 years, and $750750 in 3 years. The value of Asset 1 today is $nothing. (Round to the nearest cent.)

Question

Business

Deacon Rivers

9 November, 16:45

You have two assets and must calculate their values today based on their payment streams and required returns. Asset 1 has a required return of 1212 % and will produce a stream of $700700 starting at year 1 and continuing indefinitely. Asset 2 has a required return of 1111 % and will produce an end-of-year cash flow of $1 comma 4001,400 in 1 year, $ 1 comma 300$1,300 in 2 years, and $750750 in 3 years. The value of Asset 1 today is $nothing. (Round to the nearest cent.)

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Answers (1)

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Baron Saunders · Answer 1

PV = $5,833.33

Explanation:

Giving the following information:

Asset 1 has a required return of 12 % and will produce a stream of $700 starting at year 1 and continuing indefinitely.

We need to find the present value of a perpetual annuity using the following formula:

PV = Cf/i

Cf = perpetual cash flow

The value of Asset 1 today is:

PV = 700/0.12 = $5,833.33