Today is January 1, 2015. The annual discount rate is 10%. Beginning in 2016, you will receive $10,000 on the first day of every year. What is the present value of this infinite sequence of cash flows?
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Answer:
$100,000
Step-by-step explanation:
A series of equal infinite cash flows that occur at the end of each period and that where there is equal interval of time between the cash flows is known as 'perpetuity'. Examples: Any commercial property that generates an X amount of revenue every month.
For this question, you simply use the following formula:
PV = Present value
D = Dividend received every year
r = Annual discount rate
PV = D/r
PV = 10,000/0.10
PV = $100,000
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