A growing perpetuity' with a first payment of $17,500 grows at a constant rate,g.If the present value of this perpetuity is $1,000,000,what is the growth rate of the cash flows,given that the interest rate is 6%?
A)1.75%
B)6%
C)6.75%
D)4.25%
E)10.75%

Question

Quizplus · Accepted Answer

The formula for the present value of a growing perpetuity is PV = C / (r - g), where C is the first payment, r is the interest rate, and g is the growth rate. Plugging in the values: $1,000,000 = $17,500 / (0.06 - g). Solving for g gives g = 0.0425 or 4.25%.

A Growing Perpetuity' with a First Payment of $17,500 Grows