An easy way to think about the value of something that generates
$10,000 profit per year is to ask what another asset would cost
that generates the same revenue. For example, how much would one
need to invest to generate $10,000 per year? The answer depends
on what rate of interest you're earning on your investment.
Suppose you can earn 10% (for simplicity), how much would
you need to invest to earn $10,000 each year? Let V be the total investment then we can find V by solving
V x 0.1 = 10,000
V = 10,000/0.1
V = 100,000So an asset that pays $10,000 a year forever is worth about $100,000
if interest rates are near 10%.
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