Question

. A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $1000. Each year after that, you will receive a payment on the anniversary of the last payment that is 8% larger than the last payment. This pattern of payments will go on forever. If the interest rate is 12% per year. What is today’s value of the bequest?

Answer 1

Answer:

$25,000

Explanation:

Data provided in the question

First payment will occur in a year = $1,000

Growing rate = 8%

Interest rate = 12%

So, the today value of the bequest is

= (First payment will occur in a year) ÷ (Interest rate - growing rate)

= ($1,000) ÷ (12% - 8%)

= ($1,000) ÷ (4%)

= $25,000

Hence, the today value of the bequest is $25,000