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Aunt Clarisse has promised to leave you an annuity that will pay $60 next year and grow at an
annual rate of 4%. The payments are expected to go on indefinitely and the interest rate is 9%.
What is the present value of the growing perpetuity?
A) $667
B) $693
C) $1,200
D) $1,248
E) None of the above

Respuesta :

hyderali230

Answer:

C) $1,200

Explanation:

Annuity Next year = D = $60

Interest rate= r = 9%

Growth rate = g = 4%

Use Following formula to calculate Present value of growing perpetuity:

Present Value = annuity payment next year / ( Interest rate - Growth rate )

PV = D / ( r - g )

PV  = $60 / ( 9% - 4% )

PV  = $60 / 5%

PV  = $60 / 0.05

PV = $1,200

So the correct option is C) $1,200.

jayilych4real

The present value of the growing perpetuity is C) $1,200

Calculations and Parameters:

Given the following data:

  • Annuity Next year = D = $60
  • Interest rate= r = 9%
  • Growth rate = g = 4%

To calculate the Present value of growing perpetuity:

Present Value = annuity payment next year / ( Interest rate - Growth rate )

  • PV = D / ( r - g )
  • PV  = $60 / ( 9% - 4% )
  • PV  = $60 / 5%
  • PV  = $60 / 0.05
  • PV = $1,200

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