Question

What is the present value of a stream of cash flows that pays $50 a year forever except
for years 7 and 8? Discount rate is 10%. (The timeline of this stream of cash flows is
given below)
CF $50 $50 $50 $50 $50 $50 $50 $50 …….
Year 0 1 2 3 4 5 6 7 8 9 10 …….

Answer 1

Given 50 $ Perpetuity periodic interest rate 10% Solution Step 1: Calculate present value of perpetuity of $ 50 (that is assuming cashflow to be received in year 7 and 8) Present Value of Perpetuity perpetuity Interest rate 50 10% 500 $ Step 2: Calculate present value of cashflow of year 7 and 8 Year Cash Flow PVF PV 7 50 0.513 25.66 8 50 0.467 23.33 PV of cashflow of year 7 and 8 48.98 Step 3: Present value of a stream of cash flows that pays $50 a year forever except for years 7 and 8 Present Value Present Value of Perpetuity - Present value of cashflow of year 7 and 8 500 48.98 451.02 $ Hence, Present value of a stream of cash flows that pays $50 a year forever except for years 7 and 8 is 451.02 $