Question

Clarissa wants to fund a growing perpetuity that will pay $ 12 comma 000 per year to a local​ museum, starting next year. She wants the annual amount paid to the museum to grow by 5​% per year. Given that the interest rate is 10​%, how much does she need to fund this​ perpetuity?

Answer 1

Answer:

Present Value= $240,000

Explanation:

Giving the following information:

Perpetuity= $12,000

Growing rate= 5%

Interest rate= 10​%

To calculate the present value of this perpetual annuity, we need to use the following formula:

PV= Cf/ (i - g)

Cf= cash flow

i= interest rate

g= growing rate

PV= 12,000/ (0.10 - 0.05)

PV= $240,000