1. Given an interest rate of 8%, how much is a perpetuity of $100,000/year worth?
2. How much would the same perpetuity be worth if it was expected to grow at a rate of 3% annually? How much additional value is attributable to growth?
3. How much would a 25-year zero-growth annuity be worth with the same discount rate? Comment on how this value compares to what you computed in (a).
4. Explain how you would handle a situation whereby the growth for the first five years was expected to be 10% prior to settling in at 3%/year thereafter.