Homework: Homework 3 re use Score: 0 of 10 pts HW Score: 61.36%, 135 of 220 pts

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Homework: Homework 3 re use Score: 0 of 10 pts HW Score: 61.36%, 135 of 220 pts 21 of 22 (19 complete) p6-46 (similar to) Question Help * k3 (Present value of a growing perpetuity) As a result of winning the Gates Energy Innovation Award, you are a growing perpetuity. The first payment wil occur in a year and will be for $25,000 You will continue receiving monetary awards annually with each award increasing by 5 percent over the previous award, and these monetary awards will continue forever. If the appropriate interest rate is 13 percent, what is the present value of this award? 1:51ar 25 po stion The present value ofthe award is (Round to the nearest cent) stions: Clear All o search

Explanation / Answer

Perpetual growth rate = 5%

Discount rate = 13%

T=0 --->no payment

T = 1----> $25,000

T = 2---->25,000*(1+0.05) = 26,250.

T = 3 ---->25,000*(1+0.05)*(1+0.05) = 27,562.50...so on and so forth.

Lets calculate the Present value using gordon growth model. At T=0, the present value is given by

PV at T=0 = Cash Flow at T= 1/(Discount Rate - growth rate)

= 25,000/(0.13-0.05)

= $312,500

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