NPV of Perpetuity
I have just enrolled in a Finance subject and was given an assignment.
This is the question that I am unsure about, any help would be much appreciated. Thank you so much.
What is the NPV of a project that has the following cash flows?
- An initial investment of $20, 000 today
- Perpetuity of $8, 000 every two years, starting one year after the investment (i.e. $8000 in year 1, 3, 5, 7...)
- The required rate of return is 8% p.a.
Thank you for taking the time to read this and helping me out... really appreciate it.
You simply MUST learn to describe cash flows with Basic Principles.
With a few definitions:
i = 0.01
v = 1/(1+i)
This one is easily written:
20000 + 8000(v + v^3 + v^7 + ...)
Your only remaining task is to add up the expression in the parentheses.