Clarissa wants to fund a growing perpetuity that will pay $ 12 comma 000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5 % per year. Given that the interest rate is 10 %, how much does she need to fund this perpetuity?

Question

Lena Cook

Business

9 January, 13:53

Clarissa wants to fund a growing perpetuity that will pay $ 12 comma 000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5 % per year. Given that the interest rate is 10 %, how much does she need to fund this perpetuity?

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Answers (1)

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Hall · Answer 1

Present Value = $240,000

Explanation:

Giving the following information:

Perpetuity = $12,000

Growing rate = 5%

Interest rate = 10 %

To calculate the present value of this perpetual annuity, we need to use the following formula:

PV = Cf / (i - g)

Cf = cash flow

i = interest rate

g = growing rate

PV = 12,000 / (0.10 - 0.05)

PV = $240,000