Which one of the following would have the greatest value assuming each has a Year 0 cash flow of zero and a Year 1 annual cash flow of $100? Assume a discount rate of 8 percent,compounded annually.Also,assume any growth rate is positive.

Question

Quizplus · Accepted Answer

A growing perpetuity has an infinite stream of cash flows that grow at a constant rate, while a growing annuity has a finite stream of cash flows that grow at a constant rate. Since we are assuming positive growth rates, the growing perpetuity would have the greatest value, as it would continue to pay out cash flows indefinitely. An annuity has a finite duration, so its total value would be less than the growing perpetuity. The same applies to a growing annuity, which has a finite duration but increasing cash flows. Therefore, the best choice is option C, the growing perpetuity.

Which One of the Following Would Have the Greatest Value