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 $176,000 received two years from today. Subsequent annual cash flows will grow at 3.6 percent in perpetuity.

What is the present value of the technology if the discount rate is 9 percent?

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 $176,000 received two years from today. Subsequent annual cash flows will grow at 3.6 percent in perpetuity.

Explanation / Answer

Present Value of growing perpetuity = Annual cash flow in year 1 / (discount rate-growth rate)

= 176000/(.09-.036)

= 176000/.054

= 3,259,259.26

THis is the present value in year 2. So present value today can be calculated as

Future value/(1+discount rate)^no. of periods

3,259,259.26/(1.09)^2

3,259,259.26/1.1881

2,743,253.31

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