Consider a growing perpetuity that will pay $100 in one year.Each year after that,you will receive a payment on the anniversary of the last payment that is 6% larger than the last payment.This pattern of payments will continue forever.If the interest rate is 11%,then the value of this perpetuity is closest to:
A)$1667.
B)$588.
C)$2000.
D)$909.

Question

Quizplus · Accepted Answer

We can use the formula for the present value of a growing perpetuity with growth rate g and discount rate r:
PV = C/(r-g)
In this case, C = $100 and g = 6%, so we have:
PV = 100/(0.11-0.06) = $2000
Therefore, the value of the perpetuity is closest to option C, $2000.

Consider a Growing Perpetuity That Will Pay $100 in One