You are evaluating a growing perpetuity product from a large financial services firm. The product promises an initial payment of $23,000 at the end of this year and subsequent payments that will thereafter grow at a rate of 0.03 annually. If you use a discount rate of 0.08 for investment products, what is the present value of this growing perpetuity? Round to two decimal places.

Question

Bozley

Business

1 January, 19:15

You are evaluating a growing perpetuity product from a large financial services firm. The product promises an initial payment of $23,000 at the end of this year and subsequent payments that will thereafter grow at a rate of 0.03 annually. If you use a discount rate of 0.08 for investment products, what is the present value of this growing perpetuity? Round to two decimal places.

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Guy · Answer 1

Present Value of the perpetuity = $460,000

Explanation:

A perpetuity is a series of equal periodic cash payment or receipt that occurs for the foreseeable future. i. e for an indefinite period of time

To calculate the Present value of a perpetuity, we use the formula below:

PV = A / (r-g)

A - cash flow in year 1, r - discount rate, g - growth rate

A - 23,000, r - 8%, g - 3%

PV = 23,000 / (0.08-0.03)

= $460,000