Question

Nathaniel would like to establish a trust fund that will provide R380 000 a year, forever, for his descendants. The trust fund will be invested very conservatively, so the expected rate of return is only 6,45%. How much money must he deposit today, to fund this gift for his descendants?

Answer 1

Explanation:

To calculate the amount of money Nathaniel needs to deposit today to fund this gift for his descendants, we can use the present value formula for a perpetuity:

Present Value = Annual Payment / Discount Rate

In this case, the annual payment is R380 000 and the discount rate (expected rate of return) is 6.45% in decimals, or 0.0645 as a fraction. So we can plug these values into the formula:

Present Value = R380 000 / 0.0645

This gives us a present value of approximately R5,899,225.68. Therefore, Nathaniel would need to deposit R5,899,225.68 today into the trust fund to provide R380 000 a year forever for his descendants, assuming a 6.45% expected rate of return.