Consider a growing perpetuity that will pay $250 in one year.Each year after that, you...

Consider a growing perpetuity that will pay $250 in one year. Each year after that, you will receive a payment that is 7% larger than the last payment. This pattern of payments will continue forever. If the interest rate is 10%, then the value of this perpetuity is closest to:

$5561 $8333 $6215 $4000

Solutions

Expert Solution

Cashflow in one year(CF1) = $250

The cashflow will grow each year(g) = 7% per year forever

Interest rate(r) = 10%

Calculting the Present Value(PV) if Growing Perpetuity:-

PV = CF1/(r-g)

PV = $250/(0.10 - 0.07)

PV = $8333.33

So, the value of this perpetuity is closest to $8333. Option 2

jeff jeffy answered 1 year ago

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