Shelton Enterprises is expecting tremendous growth from its newest boutique store. Next year the store is expected to bring in net cash flows of $675,000. The company expects its earnings to grow annually at a rate of 13 percent for the next 15 years. What is the present value of this growing annuity if the firm uses a discount rate of 18 percent on its investments? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

The present value of a growing annuity can be calculated using the formula: PV = C * [(1 - (1 + g)^t / (1 + r)^t) / (r - g)], where C is the cash flow, g is the growth rate, r is the discount rate, and t is the number of periods. Plugging in the values: C = $675,000, g = 0.13, r = 0.18, and t = 15, the present value is approximately $6,448,519.

Shelton Enterprises Is Expecting Tremendous Growth from Its Newest Boutique