Question

You are the recipient of a gift that will pay you $25,000 one year from now and every year thereafter for the following 24 years. The payments will increase in value by 2.5 percent each year. If the appropriate discount rate is 8.5 percent, what is the present value of this gift?

Answer 1

Answer:

present value of growth = $310289.65

Explanation:

given data

cash inflow P= $25,000

time t = 24 years

discount rate r = 8.5 percent

growth rate g = 2.5 percent

solution

we get here present value of growth that is express as

present value of growth = $\frac{cash\ inflow}{r-g} \times 1- (\frac{(1+g)}{1+r})^t}$  .................1

put here value and we will get

present value of growth = $\frac{25000}{0.085-0.025} \times 1- (\frac{(1+0.025)}{1+0.085})^{24}}$  

present value of growth = 416666.67 ×  0.74469

present value of growth = $310289.65