NPV with perpetuity growth rate

[Dave]

What is the formula for calculating the NPV of an income
stream for that runs over a 10 year period and then has a
growth rate of 5% in perpetuity.

Yr1:$630 Yr2:$799 Yr3:$529 Yr4:$718 Yr5: $908 Yr6:$1,060
Yr7:$1,147 Yr8:$1,268 Yr9:$1,394 Yr10:$1,578

Discount rate:10.6% and growth rate after 10 years is 5%

Thanks in advance

 

[Norman Harker]

Hi Dave!

Amend the year 10 cash flow to:

=1578+(1578*1.05)/(10.6%-5%)

NPV is then 16296.8428739057

You can check this by using a year 11 cash flow of 1578*1.05 and
copying down (say) 200 cells. The NPV of that extended cash flow is
16296.285624389

What you are doing is capitalizing the estimated flow after 10 years.
The income multiplier used is 1/(e-g) where e is the discount rate and
g the growth rate.

 

[Norman Harker]

Hi Dave!

I should add than in my NPV calculations I've assumed that the incomes
are received at the end of each period.

--
Regards
Norman Harker MVP (Excel)
Sydney, Australia
(e-mail address removed)
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