Question

An asset pays $20 today. It then pays $10 at the end of year one with payments decreasing by $1 per year until the end of year 10. It then pays a perpetuity with a payment of $15 at the end of year 11 with each subsequent payment growing by 3% annually. If the annual effective discount rate equals 6.5%, calculate the present value of the asset.

Answer 1

D A B с 1 value of the assest is what it is giving in the future. 2 year 3 0 1 4 5 6 discount discounted factor Project a value 1.00 0.00 0.00 0.94 10.00 9.39 0.88 9.00 7.93 0.83 8.00 6.62 0.78 7.00 5.44 0.73 6.00 4.38 0.69 5.00 3.43 N 3 7 4 8 5 9 6 10 7 0.64 4.00 2.57 11 8 0.60 3.00 1.81 12 9 0.57 2.00 1.13 13 10 0.53 1.00 0.53 0.50 15.00 7.50 0.50 441.43 14 11 15 perpetual 16 net present value 17 18 the value of the share is 220.81 271.56 271.56

B с D A 1 value of the assest is wha 2 year 30 4 1 5 2 6 3 7 4 8 5 96 discount factor 1 =+B3/1.065 =+B4/1.065 =+B5/1.065 =+B6/1.065 =+B7/1.065 =+B8/1.065 =+B9/1.065 =+B10/1.065 =+B11/1.065 =+B12/1.065 =+B13/1.065 =+B14 discounted Project a value 0 =+C3%B3 10 =+C4*B4 =+C4-1 =+C5*B5 =+C5-1 =+C6*B6 =+C6-1 =+C7*B7 =+C7-1 =+C8*B8 =+C8-1 =+C9*B9 =+C9-1 =+C10*B10 =+C10-1 =+C11*B11 =+C11-1 =+C12*B12 =+C12-1 =+C13*B13 15 =+C14*B14 =+C14*1.03/(6.5%-3%) =+C15*B15 =SUM(D3:D15) 10 7 11 8 129 13 10 14 11 15 perpetual 16 net present value 17 18 the value of the share is 19 =+D16