A perpetual cash flow stream makes its first payment of $500 in one year. Using a 7% annual discount rate and a 3% growth rate in the value of subsequent payments, what is the present value of this growing perpetuity?
A) $2,000
B) $20,000
C) $12,500
D) $125,000

Question

Quizplus · Accepted Answer

The present value of a growing perpetuity is calculated using the formula PV = C / (r - g), where C is the first payment, r is the discount rate, and g is the growth rate. Substituting the given values: PV = $500 / (0.07 - 0.03) = $500 / 0.04 = $12,500.

A Perpetual Cash Flow Stream Makes Its First Payment of $500