Ray's Jams Inc.was just established with an investment of $5 million into stereo equipment.Ray expects his company to generate $800,000 a year for the next 200 years.If Ray's cost of capital is 15%, find the market value and book value of his company.

Question

Quizplus · Accepted Answer

Book value is given as $5 million since it is the initial investment into the company.

To find the market value, we need to calculate the present value of the 200-year annuity. Using the formula for the present value of an annuity, we get:

Market Value = $800,000 * ((1 - (1/1.15^200))/0.15) 
= $5.33 million

Therefore, the correct answer is C: Market value=$5.33 million; book value=$5.0 million.