Question

What is the present value of a $50,000 decreasing perpetuity beginning in one year if the discount rate is 7% and the payments decline by 4% annually?

Answer 1

Present Value = $1666666.67

Step-by-step explanation:

Present Value of a Growing Perpuity is calculated using the following formula

PV =D/(r - g)

Where D = Dividend

r = Discount Rate

g = Growth rate

D = $50,000

r = 7%

r = 7/100

r = 0.07

g = 4%

g = 4/100

g = 0.04

PV = D/(r-g)

Becomes

PV = $50,000/(0.07-0.04)

PV = $50,000/0.03

PV = $1,666,666.67

So the Present Value of the perpuity is $1,666,666.67