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Time value of money

Johnny has a technology that will be available in the near term. He anticipates his first annual cash flow from the technology to be $215,000, received two years from today. Subsequent annual cash flows will grow at 4% in perpetuity. What is the present value of the technology if the discount rate is 10%?

What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 12 year annuity of $7,500 per year at the current interest rate of 10% per year. What happens to the value of your investment if interest rates suddenly drop to 5%? What if interest rates suddenly rise to 15%?

use formula or calculator, not excel

Solution Preview

The first cash flow is in year 2 and the cash flows grow at a constant rate. To find the present value of cash flows we use the constant growth formula which gives the present value as
PV = CF 1/(Required return - growth rate)
In this case
CF 1 = expected cash flow = Cash flow in year 2 = ...

Solution Summary

The solution explains some questions relating to time value of money