Chapter 4 – Solved Cases
79
r = 5 % + 1.25 (12% - 5 %) = 5% + 8.75% = 13.75% = 0.1375
NPV: So, the NPV of a perpetuity with yearly cash flow of
$66,700 is:
NPV = $ 66,700 / r = 66700 / 0.1375 = $485,090.
Final Answer: The coffee stand should cost $485,090 or
approximately $500,000 dollars. So, to buy it, one must pay a
maximum of half-a-million dollars and no more.
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