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20 August, 07:38

In your will, you bequeath $6,000,000 into an account that earns 15% annually. The account will fund an annual award in perpetuity that will be given to a world leader who has excellent intentions to promote peace. If you want the award amount to increase by 5% every year, what will be the first year's award amount be?

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  1. 20 August, 10:59
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    PV = C / (r - g)

    PV = $6,000,000

    r = 15%

    g = 5%

    C = ?

    ∴ C = PV * (r - g) = $6,000,000 * (15% - 5%) = $6,000,000 * 10%,

    C = $600,000

    Explanation:

    Present Value of Growing Perpetuity is given thus:

    PV = C / (r - g)

    where PV = Present Value

    C = Payment

    r = rate of return for a period

    g = growth rate for a period
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