Calculate the present value of a growing annuity given the following information: current cash ﬂows: $90,000; cash ﬂow growth rate = 2%; timeframe = 20 years; required rate of return = 5%.

Question

Quizplus · Accepted Answer

To calculate the present value of a growing annuity, we use the following formula:

PV = C / (r - g) * (1 - (1 + g) ^ (-n))

where: 
PV = present value 
C = current cash flows 
r = required rate of return 
g = cash flow growth rate 
n = time frame in years

Substituting the given values, we get:

PV = 90,000 / (0.05 - 0.02) * (1 - (1 + 0.02) ^ (-20)) 
PV = $1,319,886

Therefore, the best choice is A.

Calculate the Present Value of a Growing Annuity Given the Following