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Newbie here, trying wrap my head around on why this doesn't add up:

Calculating the discounted cash flow of a perpetuity paying $1000 per year, 15% discount rate and 5% growth.

If I calculate from the current year, it's

$1000/(15% - 5%) = $10,000

However it's not the same number if I calculate from next year:

$1000 + ($1000 * 1.05)/(15% - 5%)/1.15 = $10,130.43

Why is there an extra $130.43 ?

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  • $\begingroup$ In the second formula you forgot to discount the first payment (which by assumption occurs 1 year from now). The correct calculation is $\frac{1000}{1.15}+\frac{1000*1.05}{(0.15-0.05)*(1.15)}= 10,000$ $\endgroup$ – Alex C Jun 14 at 1:54

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