Question: Shirley has been offered two perpetuities Grow and Shrink Grow
Shirley has been offered two perpetuities: Grow and Shrink. Grow promises her $100 in one year and an annual cash flow that will increase by 4 percent per year forever. Shrink, in contrast, promises her $1,000 in one year but the annual cash flow will decline by 2 percent forever. If her opportunity cost is 5 percent per year and both annuities cost $1,000, which annuity offers her the greater value?
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