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?
E) None of the above
29 March, 17:02
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.
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» 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%.