Solution-Present value of a growing annuity formula

Present value of a growing annuity formula

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Reference no: EM132481036

The BU chapter of Habitat for Humanity wants to raise money to help families on the North Carolina coast to build homes in communities farther away from flood zones. They plan to fund the construction of one home per year during Spring Break forever and have made the following assumptions:

They plan to fund the first home in four years
They plan to invest $10 million today
They want the funding to increase by 3% per year after the first house is built in order to cover increases in material costs.
Assume an interest rate of 5% (EAR)

Based on the above assumptions, how much will the funding be for the first home in four years?

A) $200,000

B) $218,545

C) $231,525

D) $243,101

The correct answer is C) $231,525 but I'm not sure if I should use the present value of a growing annuity formula (PV= C * 1/r-g (1- (1+g/ /1+r)ⁿ) or present value of a perpetuity formula (PV= C/ r-g) and what the exact steps are using one of these formulas.

Reference no: EM132481036

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Present value of a growing annuity formula

Reference no: EM132481036

Reference no: EM132481036

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