A growing perpetuity pays Rs. 2,000 at the end of the first year, with payments increasing by 3% annually. If the discount rate is 8%, what is its present value?
Correct answer: B. Rs. 40,000
- A. Rs. 25,000
- B. Rs. 40,000
- C. Rs. 50,000
- D. Rs. 66,667
Explanation
For a growing perpetuity, present value equals the next payment divided by the discount rate minus the growth rate. Therefore, PV = 2,000 divided by (0.08 minus 0.03) = Rs. 40,000. Using 8% alone would incorrectly ignore payment growth.
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