Question

You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $24,800 at the end of this year and subsequent payments that will grow at a rate of 3.5 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

PV= $450,909.1

Step-by-step explanation:

Giving the following information:

Cash flow (Cf)= $24,800

Growth rate (g)= 3.5%

Discount rate (i)= 9%

To calculate the present value, we need to use the following formula:

PV= Cf / (i - g)

PV= 24,800 / (0.09 - 0.035)

PV= 24,800 / 0.055

PV= $450,909.1