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CS Executive · Corporate Accounting and Financial Management · Time Value of Money

For the growing perpetuity formula PV = C1/(r - g) to give a meaningful finite value, which condition must hold?

The growth rate g must be less than the discount rate r. Only then does the stream of growing cash flows have a finite, positive present value; if g is equal to or higher than r, the formula breaks down.

  1. Ag must be greater than r
  2. Bg must be equal to zero
  3. Cg must be less than rCorrect
  4. Dr must be equal to g

Explanation

The formula converges only when the growth rate is below the discount rate. If g equals r the denominator is zero, and if g exceeds r the result is negative and meaningless.

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