Question
Annuities commonly have payments that grow over time. Suppose, for example, that we are looking at a lottery payout over a 25-year period. The first
Annuities commonly have payments that grow over time. Suppose, for example, that we are looking at a lottery payout over a 25-year period. The first payment, made one year from now, will be $100,000. Every year thereafter, the payment will grow by 6 percent, so the payment in the second year will be $100,000 1.06 = $106,000. The payment in the third year will be $106,000 1.06 = $112,360, and so on. Whats the present value if the appropriate discount rate is 10 percent? Returning to our lottery example, now suppose the payments continue forever. In this case, what is the present value?
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