Growing annuity: Wilbon Company is evaluating whether it should take over the lease of an ethnic restaurant in Manhattan. The current owner had originally signed a 25-year lease, of which 16 years still remain. The restaurant has been growing steadily at a 7 per cent growth for the last several years. Wilbon Company expects the restaurant to continue to grow at the same rate for the remaining lease term. Last year, the restaurant brought in net cash flows of $310,000. If the firm evaluates similar investments at 15 per cent, what is the present value of this investment? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

The present value of a growing annuity can be calculated using the formula for the present value of a growing annuity. Given the cash flow of $310,000, a growth rate of 7%, a discount rate of 15%, and a period of 16 years, the present value is approximately $2,838,182.

Growing Annuity: Wilbon Company Is Evaluating Whether It Should Take