Question
This question introduces you to the concept of an annuity with growth. The formulae is given on p.3, equation (7), of the Note on Formulae,
This question introduces you to the concept of an annuity with growth. The formulae is given on p.3, equation (7), of the Note on Formulae, but I would encourage you to try doing it in Excel as well. (If the first cash flow is C, the next one will be C(1+g), and so on, where g is the growth rate in cash flow). As an example, the present value of an annuity that starts one year from now at $100, and grows at 5%, with the last cash flow in year 10, when the discount rate is 7%, is $860. Confirm this before attempting the problem using both the formula and excel. What is the NPV of of a new software project that costs $900,000 today, but has a cash flow of $180,000 in year 1 that grows at 7.0% per year till year 20? Similar investments earn 7.6% per year.
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