6. You expect the price of a certain painting to increase by 8% a year. The...
6. You expect the price of a certain painting to increase by 8% a year. The interest rate is 10%. You are willing to pay $100 a year to have the painting on your wall. How much would you be willing to pay for the painting?
Homework Answers
The amount a person is willing to pay for the painting is found using present value of growing perpetuity equation.
where A = annual payment
r = interest rate
g = growth rate
The amount the person is willing to pay for the painting = $ 5000
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