Question

1)

What is a limitation for the formula for the present value of a growing perpetuity, PV = C/(r-g)?

A) There no Limitations

b) g > r

c) g only takes into account the growth in revenue

D) r > g

2) In your will, you bequeath $6000000 into an account that earns 11% 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 6% every year, what will be the first year's award amount be?

3) You start saving $1000 at the end of this year and increase your saving by 7% every year for 19 years. Your account earns 9%. How much will you have in your account in 19 years?

Answer 1

1.

Option B is correct.

g > r

Explanation:

if g > r then, Present Value will be negative and present value of growing perpetuity cannot be negative.

2.

Here,

Present Value = $6,000,000

r = 11% annually

g = 6% per year

PV = C/(r-g)

C = PV(r - g)

C = 6000000(0.11 - 0.06)

C = $300,000

First year's award will be $300,000

3.

P = $1,000

g = 7%

n = 19 years

r = 9%

Present Value of Growing Annuity = $14,831.14