Question

Clarissa wants to fund a growing perpetuity that will pay $6000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 6% per year. Given that the interest rate is 10%, how much does she need to fund this perpetuity?

Answer 1

Answer:

She needs $150,000 to fund this perpetuity.

Explanation:

In this question we need to find the present value of this perpetuity. Because this is a growing perpetuity we will need to use the formula of present value of a growing perpetuity.

PV of growing perpetuity = Payment/ R-G

The payment is the current payment the perpetuity will pay which is 6,000, R is the interest rate which is 10% and G is the growth rate of the perpetuity which is 6%. Now we will input these values in the formula in order to find the present value of the perpetuity.

6,000/0.1-0.06

=6,000/0.04

=150,000