The first payment amount (Year 1)
Annual growth rate of payments (e.g., inflation rate)
Annual discount rate (required rate of return)
Number of years you will receive growing payments
What is a Growing Annuity?
A growing annuity is a series of payments that increase at a constant rate over time. Unlike regular annuities with fixed payments, growing annuities account for inflation, salary increases, or other growth factors that cause payments to rise each period.
Common Applications
- • Inflation-adjusted pension planning
- • Salary projection and career planning
- • Growing dividend stock valuation
- • Real estate income projections
- • Business cash flow with growth
Key Factors
- • Growth Rate: Annual increase in payments
- • Discount Rate: Required rate of return
- • Rate Relationship: Growth vs discount rate matters
- • Time Horizon: Longer periods amplify growth effects
Special Considerations
- • r = g Case: Special formula when rates are equal
- • High Growth: Can lead to very high present values
- • Negative Growth: Payments decrease over time
- • Sensitivity: More sensitive than regular annuities
What is a Growing Perpetuity?
A growing perpetuity is a cash flow that is expected to grow at constant rate forever. The present value of a growing perpetuity can be Expected Cash Flow Next Year / ( Discount Rate - Growth Rate).
For example: A stock that paid $2 as dividends last year. Assume the dividends to grow 2% a year to perpetuity and the required rate of return is 8%. With these inputs, the value of stock is $2*(1+2%)/(8%-2%) = $34.