Question

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.

Answer 1

Answer:

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