PV of Growing Annuity Using Excel | Sample CFA Quantitative Methods Level 1 Problem

In this video I walk you through a simple exercise in Excel that shows you how you can calculate the PV of a growing annuity using Excel.

Reference: Corporate Finance (13e) by Ross, Westerfield, Jaffe and Jordan. Chapter 4, Problem 4-33

[ssubramanian]

Ended up here while I was searching for the growing annuity formula. Very helpful! Thank you Professor! I am a subscriber now

[grantvanderhorst]

What if your growth rate and discount rate are the same value? The formula errors out because you're dividing by 0.

[professorikram]

Great question. The formula only applies when the growth rate (in cash flows) is expected to prevail in perpetuity. In most (if not all) applications, this growth rate tends to be relatively low, between 1-3%. For instance, dividends on most stocks grow in that range. Similarly, mature companies (that eventually run of high growth investment opportunities) eventually start seeing their cash flows grow in this range as well (think McDonalds of the world).

All this to say that in almost all applications of the formula, the growth rate tends to be lower that the cost of capital or the required rate of return on the investment (R).

Nonetheless, as you rightly pointed out, the formal can ONLY be used if R is greater than g. If R is equal to or even less than g, the formula is undefined. Basically the PV doesn’t converge to a single value - it is infinite.

Thanks for your question. Hope this helps.

[noelnguyen]

@professor Ikram would you mind helping to advise me how to add the timeline into the excel file showing 0/1/2/3/4/5 in your video ? Thank You very much

[justinpritchard]

Thank you, nicely done! It seems like this takes the payment at the end of each period(?). Is there an easy way to make the payment due at the beginning, please?