FINC19011 – BUSINESS FINANCE-Wk02-2

Management is looking to open a new station in the

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Unformatted text preview: t constant rate Cash flows that grow at a Growing annuity constant rate • Use this equation to value the present value of growing annuity when the growth rate is less than discount rate Cash flows that grow at a Growing perpetuity rate constant • When cash flow stream features constant growing annuity forever CF1 PVA ∞ = (i - g ) e.g. Growing annuity • Growing annuity: Gull Petroleum Ltd owns several service stations. Management is looking to open a new station in the northern suburbs of Perth. One possibility they are evaluating is to take over a station located at a site that has been leased from the state government. The lease, originally for 99 years, currently has 73 years before expiration. The service station generated a net cash flow of $92,500 last year, and the current owners expect an annual growth rate of 6.3 per cent. If Gull uses a discount rate of 14.5 per cent to evaluate such businesses, what is the present value of this growing annuity? PVAGrowing 1 + g n 92, 500 × 1.063 1.063 73 CF1 = × 1 − × 1 − ÷= ÷ (i − g ) 1 + i (0.145 − 0.063) 1.145 98, 327.50 = × 1 − 0.92838427973 0.082 = 1199115.854 × 0.995593154 = $1, 193, 831.54 Slide 36 li e.g. Growing perpetuity • Growing perpetuity: You are evaluating a growing perpetuity product from a large financial services company. The product promises an initial payment of $20,000 at the end of this year and subsequent payments that will thereafter grow at a rate of 3.4 per cent annually. If you use a 9 per cent discount rate for investment products, what is the present value of this growing perpetuity? CF1 20, 000 PVA∞ = = (i − g ) (0.09 − 0.034) = $357, 142.86 Term Loans Level cash flows: annuities and perpetuities Preparing a loan amortisation schedule • Amortisation: the way the borrowed amount (principal) is paid dow...
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This document was uploaded on 03/27/2014.

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