A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a...

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A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a...

A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be

$ 1 comma 000$1,000.

Each year after that, you will receive a payment on the anniversary of the last payment that is

nbsp 3 % 3%

larger than the last payment. This pattern of payments will go on forever. Assume that the interest rate is

12 %12%

per year.

a. What is today's value of the bequest?

b. What is the value of the bequest immediately after the first payment is made?

a. What is today's value of the bequest?

Today's value of the bequest is

$nothing.

(Round to the nearest dollar.)

business finance

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Answer 1

Answer #1

a). PV = Cash Flow in 1 year / [r - g] = $1,000 / [0.12 - 0.03] = $1,000 / 0.09 = $11,111.11, or $11,111

b). PV = Cash Flow in 1 year / [r - g]

= [$1,000 * (1 + 0.03)] / [0.12 - 0.03] = $1,030 / 0.09 = $11,444.44, or $11,444

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Answer 2

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