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Thread: NPV of Perpetuity

  1. #1
    Apr 2009

    NPV of Perpetuity

    Hi all,

    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.
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  2. #2
    MHF Contributor
    Aug 2007
    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.
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