Question

You purchase a growing annuity. The growing annuity will make a payment of $10,000 one year from today. The payment will increase by 6.2% per year. There will be a total of 30 payments. You require a rate of return of 10.6% compounded annually. How much should you pay for the growing annuity?

Answer 1

Growing Annuity will make a payment of $10,000 one year from now

Calculating the Present value of Growing annuity:-

Where, C= Fiirst Payments = $10,000

r = Periodic Interest rate = 10.6%

g = Growth rate of annuity = 6.2%

n= no of periods = 30 payments

Present value = $160,032.52

So, the amount you should pay for the growing annuity is $160,032.52

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