Present Value of Growing Annuity

The Present Value of a Growing Annuity (PVGA) is a financial formula used to determine the present value of a series of future cash flows that grow at a consistent rate. It's particularly useful for valuing cash flows that increase over time, such as rental income, dividends, or pension payments.

Formula

The formula to calculate the Present Value of a Growing Annuity is:

PVGA = Pmt × [(1 - (1 + g)^-n) / (r - g)]

Where:

• PVGA = Present Value of the Growing Annuity
• Pmt = Payment amount in the first period
• g = Growth rate of the annuity
• r = Discount rate (interest rate)
• n = Number of periods

Use of Present Value of Growing Annuity

The Present Value of a Growing Annuity can be used in several scenarios, including:

• Valuation of Investments: Investors can assess the value of income streams that grow over time, such as stocks paying increasing dividends.
• Financial Planning: Individuals planning for retirement can estimate the present value of future payments from pensions that increase annually.
• Real Estate Investments: Landlords can calculate the present worth of future rental income that is expected to rise annually.

Using the PVGA formula, individuals and businesses can make informed financial decisions based on the expected growth of cash flows over time.