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Q: current day value of cash flow ( Answered ,   0 Comments ) Question
 Subject: current day value of cash flow Category: Business and Money Asked by: coffey5-ga List Price: \$14.88 Posted: 25 Jul 2006 09:43 PDT Expires: 24 Aug 2006 09:43 PDT Question ID: 749355
 ```I have an investment that pays me \$19.50 per year for the next 40 years. The 19.50 increases 3% per year as a cost of living increase. I want to sell the cash flow and the buyer expects a 10% return. What is the current day value? How muc is it worth if the buyer want 8% or 12% return respectively?``` Subject: Re: current day value of cash flow Answered By: livioflores-ga on 26 Jul 2006 07:49 PDT Rated: ```Hi!! This is a Growing Annuity case and you need to find the present value of it according to the required discount rate, to solve this problem you need to use the following formula: {1 - [(1+g)/(1+r)]^t} PV = A * ------------------------- (r-g) where: PV = Present Value of the growing annuity A = Initial annuity value r = Interest rate g = Growth rate t = number of time periods In this case (10% rate): A = \$19.5 r = 0.1 g = 0.03 t = 40 Then: PV = \$19.5 * {1 - [(1+0.03)/(1+0.1)]^40} / (0.1-0.03) = = \$19.5 * {0.92792551} / 0.07 = = \$258.49 For the 8% case: PV = \$19.5 * {1 - [(1+0.03)/(1+0.08)]^40} / (0.08-0.03) = = \$19.5 * {0.849845356} / 0.05 = = \$331.44 For the 12% case: PV = \$19.5 * {1 - [(1+0.03)/(1+0.12)]^40} / (0.12-0.03) = = \$19.5 * {0.964943538} / 0.09 = = \$209.07 For references see: "GROWING ANNUITIES" by Albert L. Auxier and John M. Wachowicz, Jr.: http://web.utk.edu/~jwachowi/growing_annuity.pdf "Growing Annuity": http://www.pitt.edu/~schlinge/fall99/example_growth.htm Search strategy: "present value" "Growing Annuity" I hope this helps you. Feel free to request for a clarification if you need it. Regards, livioflores-ga```
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