Your favourite aunty has finally agreed to contribute towards funding your retirement. Specifically, she will start with a contribution of $6,000 today (that is, end of year 0) but this amount will then decline at a constant rate of 3% p.a. over the foreseeable future. If the interest rate appropriate for valuing your aunty's contribution is 12% p.a. its present value today is closest to: a) $38,800. b) $44,800. c) $56,000. d) $70,667.
For this kind of question, what should I do? Is there a discounted perpetuity due formula or a formula of the sort I can use? Since it's for the "forseeable future", I'm assuming it's a perpetuity. Is my assumption wrong?
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- Correction 2nd line under explanation: 3% decline ...
- Apr 02, 2018 at 7:50am
- Forseeable future means perpetuity BUT the first cash flow is today itself, and next one is 5820 ((6000*(1-0.03)), the Growing perpetuity due will apply 6000 + ((5820 /((0.12-(-0.03)) = 6000 + 38800 = 44800 Option B
- Apr 02, 2018 at 8:06am