Question

Clarissa wants to fund a growing perpetuity that will pay $10,000 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 9%, how much does she need to fund this perpetuity?A) $250,000.00 B) $125,000.00 C) $300,000.00 D) $200,000.00

Answer 1

Answer:

A) $250,000.00

Explanation:

The computation of the amount needed to fund the perpetuity is shown below:

= (Paying amount per year) ÷ (Interest rate - growth rate)

= ($10,000) ÷ (9% - 5%)

= ($10,000) ÷ (4)

= $250,000

We simply apply the above formula by considering all the given information i.e per year paying amount, interest rate, and the growth rate