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A business is considering a project reguinng an investment of $200,000 now and with estimated cash inflows of $23,000 per annum in perpetudy The first cash inflow would be received in one year’s time. The cost of capital is 10% per annum.
What is the net present value of the investment?The cumulative discount for a perpetuity (a constant flow, starting at Time 1 and lasting for ever) is 1/r where r is the discount rate expressed as a decimal.
So, if $36,000 were going to be received each year, starting Time 1, and the discount rate was 12%, the present value of the perpetuity is:
$36,000 x 1/0.12 = $300,000.
If you had paid $250,000 to acquire that perpetuity, your NPV would be:
-$250,000 + $300,000 = $50,000.
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