Noel Klinger is planning to invest in an insurance company product. The product will pay $12,500 at the end of this year. Thereafter, the payments will grow annually at a 2.5 annual percent rate forever. Jack will be able to invest his cash flows at an annual rate of 5.5 percent. What is the present value of this investment cash flow stream? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

The present value of this investment cash flow stream can be calculated using the formula for the present value of a growing perpetuity: $PV = \frac{C}{r - g}$, where $C$ is the initial cash flow, $r$ is the discount rate, and $g$ is the growth rate. Here, $C = \$12,500$, $r = 5.5\% = 0.055$, and $g = 2.5\% = 0.025$. Plugging these values into the formula gives: $PV = \frac{\$12,500}{0.055 - 0.025} = \frac{\$12,500}{0.03} = \$416,667$, rounded to the nearest dollar.

Noel Klinger Is Planning to Invest in an Insurance Company