Question

In your will, you bequeath $6,000,000 into an account that earns 15% annually. The account will fund an annual award in perpetuity that will be given to a world leader who has excellent intentions to promote peace. If you want the award amount to increase by 5% every year, what will be the first year's award amount be?

Answer 1

PV = C/ ( r - g)

PV = $6,000,000

r = 15%

g = 5%

C = ?

∴ C = PV × (r - g) = $6,000,000 × ( 15% - 5%) = $6,000,000 × 10%,

C = $600,000

Step-by-step explanation:

Present Value of Growing Perpetuity is given thus:

PV = C/ ( r - g)

where PV = Present Value

C = Payment

r = rate of return for a period

g = growth rate for a period