A perpetuity will grow at the rate of 5% per year. One year from the date of purchase, it will pay $50,0000. If the appropriate discount rate is 10%, what is the value of the perpetuity?
A) $1,000,000
B) $500,000
C) $5,000,000
D) $1,050,000

Question

Quizplus · Accepted Answer

The value of a growing perpetuity can be calculated using the formula: PV = C / (r - g), where PV is the present value, C is the cash flow in the first period, r is the discount rate, and g is the growth rate. Here, C = $50,000, r = 10% or 0.10, and g = 5% or 0.05. Plugging these values into the formula gives PV = $50,000 / (0.10 - 0.05) = $50,000 / 0.05 = $1,000,000.

A Perpetuity Will Grow at the Rate of 5% Per