Analysis for Financial Management 10th Edition Chapter 8 Pro

Analysis for Financial Management 10th Edition, Chapter 8, Problem 8. Please answer this question.

Solution

In the given problem, cash flow per annum is $ 1000 for first 15 years with no growth and after that it grows at 4% p.a.

Therefore, you first compute present value of $ 1000 for 15 years and next compute Perptuity vale by using this formula,  Perptuity vale =CF at 15th year*(1+growth rate)/(cost of capital-growth rate).Now you can get present value of cash flows by adding both

compute present value of $ 1000 for 15 years =$ 1000*PVIAF(15,13%) =$ 1000*6.462 =$ 6,462.38

PVIAF formula =1-(1+r)^-n /r

=1-(1+.13)^-15/.13 =6.462

Now compute Perptuity vale

=1000*(1+.04)/(13%-4%)=$ 11,555.56

Present value of Perptuity vale =$ 11,555.56*PVF(15,13%) =$ 11,555.56*0.1599 =$ 1847.63

PVF formula =1/(1+r) =1/(1+.13) =0.1599  

Final answer, Present value of cash flows =$ 6,462.38+ $ 1847.63 =$ 8,310.01