Calculate the present value of a growing annuity at a discount rate of 9% per year....

Calculate the present value of a growing annuity at a discount rate of 9% per year. The growth rate (constant) of the annuity is 4% per year. the life of the annuity is 10 years. the first annuity payment is $2000 occurring at the end of year one.

Calculate using Excel please.

Expert Solution

The formula for Cashflow is mentioned in cell C2 [=B2*(1+$B$5)] and we can drag this formula to other cells till year 10.

Year 1 Cashflow is 2000 and since it is a growing annuity so, Year 2 Cashflow will be C₂ = (1+4%)*2000 = 2080

Now, the formula to calculate the present value of different cashflows is mentioned in the below screenshot.

The formula used in the cell B3 is =B2/(1+$B$6)^B1. Basically, we are using the formula to calculate the present Value of the cash-flows. A cashflow C(n) occurring at the nth period is given by:

PV = C(n)/(1+r)ⁿ where r is the discount rate.

So, the present value of the annuity is 14989.15269

Answer -> 14989.15269

jeff jeffy answered 1 year ago

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