The growth rate makes the cash flows larger, but the discount rate makes them smaller. The first thing to understand is that there are two opposing rates when dealing with graduated annuities: The growth rate and the discount rate. Fortunately, we can make the PV function do the work for us by altering the interest rate that we use. However, there are no functions that can calculate the present value or future value of a growing stream of cash flows. The HP 12C makes that easy because it has built-in functions that automatically handle annuities. We have already seen how to calculate the present value and future value of annuities. You might wish to sell it to a third party and you should know how to determine its worth. These are often paid out in a structured settlement as a graduated annuity. You might want to know how to calculate the present value of a graduated annuity if you have, for example, a legal settlement from a lawsuit or insurance company. In fact, the growth rate can be positive, negative, or zero so this is really just a generalization of a typical annuity (which would have a zero growth rate). Any finite series of cash flows that are growing at a constant rate is a graduated (or, growing) annuity. Graduated annuities are found in many places including pensions that have built-in cost of living adjustments, lotteries such as PowerBall, and others. Annuity cash flows grow at 0% (i.e., they are constant), while graduated annuity cash flows grow at some nonzero rate. So, the two types of cash flows differ only in the growth rate of the cash flows. However, a graduated annuity (also called a growing annuity) is one in which the cash flows are not all the same, instead they are growing at a constant rate (any other series of cash flows is an uneven cash flow stream). Strictly speaking, an annuity is a series of equal cash flows, equally spaced in time. Are you a student? Did you know that Amazon is offering 6 months of Amazon Prime - free two-day shipping, free movies, and other benefits - to students? Click here to learn more
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