Growing Annuity

A growing annuity is similar to an ordinary annuity, which pays the same amount each period, except that the payments grow over time. It is useful for valuing cash flows that are expected to rise with inflation or business growth for a set period.

For example, an investment pays 100 at the end of the first year, with payments growing at 3% a year for ten years. With a discount rate of 8%, the present value of these payments is about 755.

Growing annuities are used in many financial calculations, including valuing pensions that increase with inflation, leases with rising rents, salaries in personal financial planning and the forecast-period cash flows of a business that is expected to grow steadily.

A growing annuity can also be thought of as the difference between two growing perpetuities: one starting now, and one starting at the end of the annuity's life. This is why the formulas are closely related. As with growing perpetuities, the result is sensitive to the assumptions about both the discount rate and the growth rate.