A geothermal power station produces cash flow at a current rate of $14 million per year, after maintenance, all operating expenses and taxes. All the cash flow is paid out to the power stations owners. The cash flow is expected to grow at the inflation rate, which is forecasted at 2% per year. The opportunity cost of capital is 8%, about 3 percentage points above the long-term Treasury rate. (Assume this is an annually compounded rate.) The power station will operate for a very long time. Assume for simplicity that it will last forever.

(a) What is the present value of the power station? Assume the first cash flow is received one year hence.

(b) Now assume that the power stations cash flow is generated in a continuous stream, starting immediately. What is the present value?