Shirley has been offered two perpetuities: Grow and Shrink. Grow promises her $100 in one year and

Question:

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 is 5 percent per year and both annuities cost $1,000, which offers her the greater value?

Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,... Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...