Question

You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $15,200 at the end of this year and subsequent payments that will grow at a rate of 3.7 percent annually. If you use a 9 percent discount rate for investments like this, what is the present value of this growing perpetuity?

(Round answer to 2 decimal places, e.g. 15.25.)

Present Value?

Answer 1

Initial payment (P) = $ 15,200

Growth in annuity (g) = 3.7%

Discount rate (k) = 9%

PV of this growing perpetuity (PV) = P*(1+g)/(k-g) = 15,200*(1+3.7%)/(9% - 3.7%)

=$ 297,403.77

As this is occuring at the end of the year, PV of this perpetuity now = 297,403.77/(1+k) = 297,403.77/(1+9%)

= $ 272,847.498 = $ 272,847. 50