If the yearly payment is c then the present value of

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Unformatted text preview: ced to take out $30,000 in loans at 8%. You want to know what your yearly payments will be, given that you will have 5 years to pay back the loan. Special Cases: Perpetuities •0 1 C 2 C … T C ... ... • A perpetuity is simply a set of equal payments that are paid forever. If the yearly payment is $C, then the present value of the perpetuity is PV = C/r • The value of a perpetuity can be used to estimate the value of similar long-lived annuities. Example: Perpetuity versus Long-Lived Annuity • To see how the value of a perpetuity can be a useful approximation to the value of a long-lived annuity, assume a 10% interest and compare the following two alternatives: A: A perpetuity of $100. B: A 30 year annuity of $100. PVA = PVB = 10 Special Cases: Constant Growth Perpetuities • An important aspect of corporate valuation is their growth potential. This is especially so for startups in the “new economy”, where most of their value is derived from their potential growth. • Suppose you are interested to find the present value of a growing perpetuity, where the cash flow grows at a constant rate forever. Constant Growth Perpetuities • Let C1 be the cash flow at the end of this year, and g be the per period growth rate. – Then, C 2 = C1 × (1 + g) C 3 = C 2 × (1 + g ) = C 1 × (1 + g ) 2 etc ... • The...
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This note was uploaded on 01/17/2011 for the course MGMT 107 taught by Professor ? during the Winter '08 term at UC Irvine.

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