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fiasKO [112]
3 years ago
9

Your great grandfather left you a trust will pay you an annual payment of $200 today but the annuity will grow at an annual rate

of 2% every year starting next year into perpetuity. Assume the interest rate is 6%, how much is this trust worth today?
Business
2 answers:
Serga [27]3 years ago
8 0

Answer:

$5000

Explanation:

The formular to be used is the growing perpetuity formula

PV= C/r-g

from the given information

PV=200/0.06-0.02

$5000

Mrac [35]3 years ago
4 0

Answer:

The annuity is worth $5,000 today

Explanation:

We solve using the growing perpetuity formula for present value:

Principal = \frac{C}{r - g} \\Where: \\$r = interest rate\\g = grow rate

r = 0.06

g = 0.02

C = $200

$200/(0.06-0.02) = 200/.04 = $5,000

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