Solution :
Calculation of present value of a growing perpetuity:
The formula for calculating the present value of a growing perpetuity is
= CF1 / ( r – g )
Where
CF1 = First payment of the growing perpetuity ; g = Growth rate of the perpetuity ;
r = Interest rate or discount rate
As per the information given in the question we have
First payment of the growing perpetuity = CF1 = € 30,000
Growth rate of the perpetuity = g = 3 % = 0.03
Interest rate or discount rate = r = 7 % = 0.07
Applying the above values in the formula we have
= € 30,000 / ( 0.07 – 0.03 )
= € 30,000 / 0.04
= € 750,000
Thus the present value of the growing perpetuity = € 750,000
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