1) A rich relative has bequeathed you growing perpetuity. The first payment will occur in a year and will be $1,000. Each year after that, you will receive a payment on the anniversary of the last payment that is 7% larger than the last payment. This pattern of payments will go on forever. Assume that the interest rate is 13% 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?

2) You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug's profits will be $4 million in its first year and that this amount will grow at a rate of 6% per year for the next 17 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero.

What is the present value of the new drug if the interest rate is 9% per year?