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You are considering purchasing a piece of land. According to your analysis, if you plant vegetables,...

You are considering purchasing a piece of land. According to your analysis, if you plant vegetables, it will produce a cash flow of $4,000 starting at the end of year 4 and growing at an annual rate of 3% in perpetuity. If the appropriate discount rate is 9%, what is the most you should pay for this land? Round to the nearest cent.

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Answer #1

Value after year 4=(Cash flow for year 4*Growth rate)/(Discount rate-Growth rate)

=(4000*1.03)/(0.09-0.03)

=$68,666.67(Approx).

Hence current value=Future cash flows and value*Present value of discounting factor(rate%,time period)

=4000/1.09^4+68,666.67/1.09^4

=$51,478.90(Approx).

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