Question

You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $22,100 at the end of this year and subsequent payments that will grow at a rate of 4.7 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

The present value of the growing perpetuity investment with an initial payment of $22,100, a growth rate of 4.7 percent, and a discount rate of 9 percent is approximately $514,000.

Step-by-step explanation:

To calculate the present value of a growing perpetuity, you can use the formula: PV = P / (r - g), where PV is the present value, P is the initial payment, r is the discount rate, and g is the growth rate. In this case, the initial payment (P) is $22,100, the growth rate (g) is 4.7% or 0.047, and the discount rate (r) is 9% or 0.09. Plugging in the values, we get PV = $22,100 / (0.09 - 0.047) which equals PV = $22,100 / 0.043. After calculating, the present value of the growing perpetuity is approximately $514,000. This calculation shows what the series of payments from the growing perpetuity is worth today, taking into account the time value of money at the given discount rate.