Question

What is the difference in the value between the following: A growing perpetuity whose payment grows...

What is the difference in the value between the following:

A growing perpetuity whose payment grows at 4%, is discounted at 9%, and next year's payment is $1000; AND

A growing annuity for 100 years whose payment grows at 4%, is discounted at 9%, and next year's payment is $1000.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

A perpetuity is a security that pays for an infinite amount of time.

An annuity is a financial product that pays out a fixed stream of payments to an individual, and these financial products are primarily used as an income stream for retirees.

Inorder to find the difference in the value , we need to find the present value of annuity and the perpetuity.

Present value of growing perpetuity=Next Annual Payment/(Discount Rate-Payment growth rate)

PV= 1000/(0.09-0.04)=$25000

So, the present value of growing perpetuity =$25000

Present Value of growing annuity=PMT* where

i=0.009-0.004=0.005, PMT=$1000

Present value of growing annuity=$19847.91

Difference between the value =$25000-$19847.91=$5152.09

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Discuss the difference between a growing annuity and a growing perpetuity. Provide an example of each....
Discuss the difference between a growing annuity and a growing perpetuity. Provide an example of each. Also explain the annuity transformation method.
An annual growing perpetuity is currently valued $6,225.81. The next annuity payment will be $386 and...
An annual growing perpetuity is currently valued $6,225.81. The next annuity payment will be $386 and the annual discount rate is 9 percent. What is the perpetuity’s rate of growth? 0.00% 2.80% 3.10% 6.20% 9.00% ive.
1) What is a limitation for the formula for the present value of a growing perpetuity,...
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...
What is the present value of a growing perpetuity, where the first payment of $28 occurs...
What is the present value of a growing perpetuity, where the first payment of $28 occurs 6 months from now, after which payments will grow at the constant rate of 1.2% per annum, and where the interest rate is 11% p.a., compounded semi-annually?
Derive a = [1-(1+i)-n]/i as the difference between the discounted value of an ordinary simple perpetuity...
Derive a = [1-(1+i)-n]/i as the difference between the discounted value of an ordinary simple perpetuity of $1 per period and the discounted value of an ordinary simple perpetuity of $1 per period deferred for n periods.
9-7 The present value of a perpetuity is equal to the payment on the annuity, PMT,...
9-7 The present value of a perpetuity is equal to the payment on the annuity, PMT, divided by the interest rate, r: PVP PMT r. What is the sum, or future value, of a perpetuity of PMT dollars per year? (Hint: The answer is infinity, but explain why.)
(Perpetuities?) What is the present value of the? following? a. A ?$300300 perpetuity discounted back to...
(Perpetuities?) What is the present value of the? following? a. A ?$300300 perpetuity discounted back to the present at 1414 percent b. A ?$4 comma 0004,000 perpetuity discounted back to the present at 1818 percent c. A ?$240240 perpetuity discounted back to the present at 1515 percent d. A ?$6060 perpetuity discounted back to the present at 1111 percent a. What is the present value of a ?$300300 perpetuity discounted back to the present at 1414 ?percent?
Find the payment that should be used for the annuity due whose future value is given....
Find the payment that should be used for the annuity due whose future value is given. Assume that the compounding period is the same as the payment period. $19,000; quarterly payments for 9 years; interest rate 5.8% The payment should be $___ (Round to the nearest cent as needed.)
A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a...
A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $ 1 comma 000. Each year after​ that, you will receive a payment on the anniversary of the last payment that is 5 % larger than the last payment. This pattern of payments will go on forever. Assume that the interest rate is 15 % per year. a. What is​ today's value of the​ bequest? b. What is the value...
Find the present value of the following perpetuity. Perpetuity Payment Made ​At: Payment Period Interest Rate...
Find the present value of the following perpetuity. Perpetuity Payment Made ​At: Payment Period Interest Rate Conversion Period ​$370 beginning 3 months 6.2​% monthly The present value is $__. ​(Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as​ needed.)
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT