High School

Anthony owns a tanning salon that is expected to produce annual cash flows forever. The tanning salon is worth $934,100.00 and the cost of capital is 11.65%. Annual cash flows are expected with the first one due in one year and all subsequent ones growing annually by 8.10%. What is the amount of the annual cash flow produced by the tanning salon in 1 year expected to be? a)$184,484.75 (plus or minus $10) b)$263,126.76 (plus or minus $10) c)$33,160.55 (plus or minus $10) d)$26,312,676.06 (plus or minus $10)

Answer :

The amount of the annual cash flow produced by the tanning salon in 1 year is expected to be $33,160.55 (plus or minus $10).

To calculate the annual cash flow, we can use the formula for the present value of a growing perpetuity. The formula is given by:

PV = CF / (r - g),

where PV is the present value, CF is the cash flow, r is the discount rate (cost of capital), and g is the growth rate of the cash flows.

Given that the present value of the tanning salon is $934,100.00, the cost of capital is 11.65%, and the annual cash flows are expected to grow annually by 8.10%, we can rearrange the formula to solve for CF:

CF = PV * (r - g).

Plugging in the values, we have:

CF = $934,100.00 * (0.1165 - 0.0810) = $934,100.00 * 0.0355 = $33,160.55.

Therefore, the amount of the annual cash flow produced by the tanning salon in 1 year is expected to be approximately $33,160.55, with a small margin of error.

To know more about perpetuities, refer here:

https://brainly.com/question/28205403#

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