Suppose that a firm generates $40,000 of profit per year, and this profit will continue forever. At a 10% interest rate, what is the present discounted value of the firm's profit?

Question

Quizplus · Accepted Answer

The present discounted value (PDV) of a perpetuity (a constant stream of payments that continues indefinitely) is calculated as the annual payment divided by the interest rate. Here, PDV = $40,000 / 0.10 = $400,000.

Suppose That a Firm Generates $40,000 of Profit Per Year