Finance
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HP 10BII
Growing Annuity
A growing annuity is a finite number of cash flows growing at a constant rate.
The formula for the present value of a growing annuity is:
Problem:
Stuart Gabriel, a second-year MBA student, has just been offered a job at $80,000 a year.
He anticipates his salary increasing by 9 percent a year until his retirement in 40 years.
Given an interest rate of 20 percent, what is the present value of his lifetime salary?
Clear time value of money memory: Orange key, C
ALL
Compounding should remain at P/Y = 1, C/Y = 1.
First step: find out I and PMT
I = {(interest rate-growth rate)/(1+growth rate)}*100
= {(.20-.09)/(1+.09)}*100
=10.09
Press Orange key, STO, 1 to store the number
PMT = Current Annual Salary/ (1+growth rate)
= (80,000/1.09)
=73,394.50
Press Orange key, STO, 2 to store the number
Second Step: enter the following
N = 40, number of payment/cash flows in the growing annuity.
I = press RCL, 1 to recall the number we saved
PV = Unknown
PMT = RCL, 2 to recall the number
FV = 0
PV = $711,731
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Last Updated on 1 May 2002, e-mail any comments to: robert.balik@wmich.edu |