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Unformatted text preview: Web Appendix 5B Growing Annuities Answers to Questions 5B-1 An annuity is defined as a series of constant payments to be received over a specified number of periods. The term growing annuity is used to describe a series of payments that are growing at a constant rate. For example, a payment of $1,000 that is growing at a rate of 6% per year for 25 years is a growing annuity. 5B-2 Growing annuity problems can be solved two ways: (1) Calculator approach and (2) Spreadsheet model. If you use a financial calculator, first calculate the real rate of return, which is the nominal rate adjusted for inflation, and then use it for I to find the initial payment. If you use the spreadsheet method, you set up a model that is similar to an amortization table, where the account earns a certain percentage per year and payments rise at a certain inflation rate. where the account earns a certain percentage per year and payments rise at a certain inflation rate....
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