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The Required Rate of Return and Discounting Perpetuity

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1) Given an interest rate of 10% per year, what is the value at the end of year 5 of a perpetual stream of $120 annual payments starting at the end of year 9?

2) Theoretical decision to release a new revision of a book: Company estimates the new revision will cost $40,000. Cash flows from increased sales will be $10,000 in the first year. These cash flows will increase by 7% per year. The book will go out of print 5 years from now. Assume the initial cost is paid now and revenues are received at the end of each year. If the company requires a 10% return, should it undertake the revision?

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Solution Summary

The solution provides two calculations. Firstly, it shows how to discount and value a perpetuity. Secondly, it considers an investment in revising a book and calculating the required rate of return to make it worthwhile.

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Thanks. I have used Excel so that you can see the formulas in the cells and work yourself.

1) GIven an interest rate of 10% per year, what is the value at the end of year 5 of a perpetual stream of $120 annual payments starting at the end of year 9?
The Value of ...

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