Suppose that today’s date is January 1, 2019. You have the opportunity to make an investment that will pay you $100 on January 1 of every year, starting in 2020 and continuing forever. Assume the relevant discount rate is 7%.
a. What would you pay now for this investment?
b. Suppose the investment’s first cash flow comes immediately, on January 1, 2019, with subsequent cash payments every January 1 thereafter. Now how much would you pay? It might be helpful to draw the first few years of a timeline here and compare it to the situation in part a.
c. Suppose the investment’s first cash flow is 3 years from now, on January 1, 2022. On every January 1 thereafter you will receive $100. How much is this worth to you today, January 1, 2019?