Question

Growing perpetuity: You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $20,000 at the end of this year and subsequent payments that will grow at a rate of 3.4 percent annually. If you use a 9 percent discount rate for investments like this, what is the present value of this growing perpetuity

Answer 1

Answer:

The correct answer is $357,142.86.

Explanation:

According to the scenario, the given data are as follows:

Initial payment = $20,000

Growth rate = 3.4%

Discount rate = 9%

So, we can calculate the present value, by using following formula:

Present Value = Initial payment ÷ ( Discount rate - Growth rate)

By putting the value, we get

= $20,000 ÷ (0.09-0.034)

= 357,142.86

Hence, The present value of this Growing perpetuity is $357,142.86