Bryant Investments is putting out a new product. The product will pay out $32,000 in the first year, and after that the payouts will grow by an annual rate of 2.75 percent forever. If you can invest the cash flows at 7.25 percent, how much will you be willing to pay for this perpetuity? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

To find the price of the perpetuity, we need to find the present value of all the cash flows. 
PV = CF1/(r-g)
where PV = present value
CF1 = cash flow in the first year = $32,000
r = discount rate = 7.25%
g = growth rate = 2.75%
PV = $32,000/(0.0725-0.0275)
PV = $711,111 (rounded to the nearest dollar)
Therefore, the best choice is D, as it is the closest to the calculated present value.

Bryant Investments Is Putting Out a New Product