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18 April, 13:10

What is the present value of a $50,000 decreasing perpetuity beginning in one year if the discount rate is 7% and the payments decline by 4% annually?

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  1. 18 April, 14:11
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    Present Value = $1666666.67

    Step-by-step explanation:

    Present Value of a Growing Perpuity is calculated using the following formula

    PV = D / (r - g)

    Where D = Dividend

    r = Discount Rate

    g = Growth rate

    D = $50,000

    r = 7%

    r = 7/100

    r = 0.07

    g = 4%

    g = 4/100

    g = 0.04

    PV = D / (r-g)

    Becomes

    PV = $50,000 / (0.07-0.04)

    PV = $50,000/0.03

    PV = $1,666,666.67

    So the Present Value of the perpuity is $1,666,666.67
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