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AM Co will receive a perpetuity starting in 2 years’ time of $10,000 per year, increasing by the rate of inflation (which is 2%).
What is the present value of this perpetuity assuming a money cost of capital of 10.2%?
? $90,910
? $125,000
O $115,740
$74,403
The present value of the perpetuity can be calculated using the formula PV = X/ (r – g), where PV is the present value, X is the cash flow per period, r is the discount rate, and g is the growth rate.
In this case, the cash flow per period is $10,000, the discount rate is 10.2%, and the growth rate is the rate of inflation, which is 2%.
Using these values, the present value of the perpetuity can be calculated as follows:
PV = $10,000 / (0.102 – 0.02) = $115,740
Therefore, the correct answer is $115,740.
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