Question

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $1000 in the first year, and will grow by 7% per year, forever. If the interest rate is 11%, how much must Martin provide to fund this bequest

Answer 1

$25,000

Step-by-step explanation:

Calculation for how much must Martin provide to fund this bequest

Using this formula

Value provided to fund bequest= First year Cash flow /(Interest rate-Growth rate)

Let plug in the formula

Value provided to fund bequest=$1,000/(0.11-0.07)

Value provided to fund bequest=$1,000/0.04

Value provided to fund bequest=$25,000

Therefore the amount that Martin must provide to fund this bequest is $25,000