Ann decided to fund a hospital in perpetuity. The first payment is made today (t=0), which is $12,500. Each year after that, the hospital will receive payment from Ann annually. The payment will increase at a rate of 5% per year for the following three years (t=1 to t=3) after the first payment. From year four (t=4), the growth rate will decline to 3% and stay stable forever. If the annual interest rate is 12%, what is the present value of this endowment?
Ann decided to fund a hospital in perpetuity. The first payment is made today (t=0), which is $12,500. Each year after that, the hospital will receive payment from Ann annually. The payment will increase at a rate of 5% per year for the following three years (t=1 to t=3) after the first payment. From year four (t=4), the growth rate will decline to 3% and stay stable forever. If the annual interest rate is 12%, what is the present value of this endowment?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Ann decided to fund a hospital in perpetuity. The first payment is made today (t=0), which is $12,500. Each year after that, the hospital will receive payment from Ann annually. The payment will increase at a rate of 5% per year for the following three years (t=1 to t=3) after the first payment. From year four (t=4), the growth rate will decline to 3% and stay stable forever. If the annual interest rate is 12%, what is the present value of this endowment?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education