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You are evaluating a growing perpetuity product from a large financial services firm. The product promises an initial payment of $24,000 at the end of this year and subsequent payments that will thereafter grow at a rate of 0.04 annually. If you use a discount rate of 0.09 for investment products, what is the present value of this growing perpetuity? Round to two decimal places.

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Zviko

Answer:

The present value of this growing perpetuity is $499,200.

Explanation:

If cashflow is growing at a constant rate, then we call this a growing perpetuity.

Present Value of Growing Perpetuity = [Payment × ( 1 + growth rate)] ÷ [(discount rate - growth rate)]

                                                              = $24,000 (1.04) ÷ (0.09 - 0.04)

                                                              = $499,200

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