The present value of a growing annuity is the amount that an individual would be willing to pay in order to receive a stream of payments for a fixed number of periods.
It can also be used to calculate the interest rate that needs to be applied in order to grow an initial sum into the sum produced by all future cash flows resulting from compounding interest.
The formula for the Present Value of a Growing Annuity (PVGA) is given by:
P is the initial annual expense,
r is the annual return on investment,
g is the annual growth rate of the expense (inflation rate),
t is the number of years.
PVGAD – Present Value of a Growing Annuity Due
There is a slight differences on PVGAD.
- PVGA: the cashflow or stream of payment deducted by END of year
- PVGAD: the cashflow or stream of payment deducted by START of year.
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