Mark Weinstein has been working on an advanced technology in laser eye surgery.

Question

Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be $171,000 received two years from today. Subsequent annual cash flows will grow at 3.1 percent in perpetuity. What is the present value of the technology if the discount rate is 11 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value $

Explanation / Answer

Present value = cash flow in year 2 × pvf for year 2 + terminal value × pvf for year 2. ,

Terminal value in case of perpetuity.= cash flow / ke - growth

= 171000 × (1/1.11)2 + 171000 (1.031)/(11% - 3.1% )×

(1/ 1.11)2

= 171000 × .8116 + ( 176301 /7.9%) × .8116

= 138784 + 1811214

= $1949998 or $ 1950000 approx

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