How Do You Calculate The Present Value (PV) Of A Growing Annuity?
A growing annuity is a fixed number of growing cash payments. Growing annuities are not common financial vehicles. Growing annuity financial structures can be found in the real world. An example of a growing annuity scenario is a salary contract with a fixed annual increase in pay. The formula to find the present value (PV) of a growing annuity is: present value (PV) = C[(1/(r – g)) – (1/(r – g)) X ((1 + g)/(1 + r))ͭ] The annuity formula can also be written as: present value (PV) = C[(1 – ((1 + g)/(1 + r))ͭ)/(r – g))] C = the coupon, or the periodic cash flow r = discount rate. t = time period g = rate of growth per time period The discount rate is the interest rate the money could earn now in a riskless investment. The treasury rate for bonds of the same time period often are used to determine the discount rate. This article demonstrates through example how to find the present value of an annuity with the information provided in the following problem. Pat is considering getting a job
