Ask Question
29 March, 16:00

Aunt Clarisse has promised to leave you an annuity that will pay $60 next year and grow at an

annual rate of 4%. The payments are expected to go on indefinitely and the interest rate is 9%.

What is the present value of the growing perpetuity?

A) $667

B) $693

C) $1,200

D) $1,248

E) None of the above

0
Answers (1)
  1. 29 March, 17:02
    0
    C) $1,200

    Explanation:

    Annuity Next year = D = $60

    Interest rate = r = 9%

    Growth rate = g = 4%

    Use Following formula to calculate Present value of growing perpetuity:

    Present Value = annuity payment next year / (Interest rate - Growth rate)

    PV = D / (r - g)

    PV = $60 / (9% - 4%)

    PV = $60 / 5%

    PV = $60 / 0.05

    PV = $1,200

    So the correct option is C) $1,200.
Know the Answer?