Question
Assume that you are at Year 0 and are looking at two possible investments, both of which have a nominal annual required rate of return
Assume that you are at Year 0 and are looking at two possible investments, both of which have a nominal annual required rate of return of 12.24 percent. Investment A will pay a perpetual cash flow stream of $500 dollars, starting at Year 5 and going through infinity. Investment B will pay a cash flow of $500 at Year 10, but this cash flow will then grow at a constant growth rate of 6 percent every year thereafter (Year 11 = $530.00, etc.) through infinity. Given this information, determine the difference between what you would pay for Investment B at Year 0 and what you would pay for Investment A at Year 0.
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