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Suppose you wish to purchase an annuity where payments increase every year after the first by some fixed percent, h. For example:
• At the end of the first year, it pays out $R
• At the end of the second year, it pays out $R increased by h% (1+h)
• At the end of the third year, the previous year's payment again increases by h%, and so on…
To calculate the present value of such annuity, we use the following formula:
Q. You would like to purchase a 20-year annuity that will grow annually at the expected inflation rate of 3%. Payments will be made at the end of each year, starting with $10,000 at the end of this year. If the annual interest rate is 6%, what would be the present value of this annuity?