Question
Present Values of Growing Annuities Given that year 1 cash flow is $1000. Suppose you are expected to receive cash flows that are growing at
Present Values of Growing Annuities
Given that year 1 cash flow is $1000. Suppose you are expected to receive cash flows that are growing at a constant rate of 4% starting from year 1 up to 4 years. What is the present value of these growing annuities if the required rate of return is 8%?
Year | FV | PV |
1 | 1,000 | -$925.93 |
2 | 1000 x 1.04 = 1,040 | -891.63 |
3 | 1040 x 1.04 = 1,081.60 | -858.61 |
4 | 1,081.60 x 1.04 = 1,124.64 | -826.81 |
The correct answer is in the above last column. But how do I calculate PV?
I tried using this formula but could not get the PV for each of the year: PV = FV/(1 + r)-t
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started