W998AMQ1.1
1. A young man living in Beverly Hills
(we’ll call him Dylan), inherits $10million from his
father’s untimely death. Using the $10million, he wants to
know how much income he can generate every year forever. If Dylan
invests the money at 8% interest per year, how much of a cash
flow can he generate forever? (1 pt)
The formula for the Present Value of a perpetuity is: PV=CF/r. We
know PV ($10million), and r (0.08), and we need to solve for CF.
So, rearranging terms: CF=PVr = $10million * (0.08)=$800,000.