Aunt Clarisse has promised to leave you an annuity that will pay $60 next year and grow at an
annual rate of 4%. The payments are expected to go on indefinitely and the interest rate is 9%.
What is the present value of the growing perpetuity?
A) $667
B) $693
C) $1,200
D) $1,248
E) None of the above

C) $1,200

Explanation:

Annuity Next year = D = $60

Interest rate= r = 9%

Growth rate = g = 4%

Use Following formula to calculate Present value of growing perpetuity:

Present Value = annuity payment next year / ( Interest rate - Growth rate )

PV = D / ( r - g )

PV  = $60 / ( 9% - 4% )

PV  = $60 / 5%

PV  = $60 / 0.05

PV = $1,200

So the correct option is C) $1,200.

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.