Growing perpetuity: You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $20,000 at the end of this year and subsequent payments that will grow at a rate of 3.4 percent annually. If you use a 9 percent discount rate for investments like this, what is the present value of this growing perpetuity

Question

Hernandez

Business

19 May, 18:12

Growing perpetuity: You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $20,000 at the end of this year and subsequent payments that will grow at a rate of 3.4 percent annually. If you use a 9 percent discount rate for investments like this, what is the present value of this growing perpetuity

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Answers (1)

Know the Answer?

Jasper Barrett · Answer 1

The correct answer is $357,142.86.

Explanation:

According to the scenario, the given data are as follows:

Initial payment = $20,000

Growth rate = 3.4%

Discount rate = 9%

So, we can calculate the present value, by using following formula:

Present Value = Initial payment : (Discount rate - Growth rate)

By putting the value, we get

= $20,000 : (0.09-0.034)

= 357,142.86

Hence, The present value of this Growing perpetuity is $357,142.86