A business is expected to yield a continuous flow of profit at the rate of $600,000 per year. If money will earn interest at the nominal rate of 8% per year compounded continuously, what is the present value of the business forever?
A)$7,600,000
B)$7,510,000
C)$7,500,000
D)$750,000
E)$850,000

Question

Quizplus · Accepted Answer

We can use the formula for present value of a perpetuity:
PV = R/i, where PV is the present value, R is the annual payment, and i is the interest rate.
Plugging in the values, we get:
PV = $600,000/0.08 = $7,500,000
Therefore, the present value of the business forever is $7,500,000.

A Business Is Expected to Yield a Continuous Flow of Profit