Question

Sara is the recipient of a trust that will pay her $500 on the first day of each month, starting immediately and continuing for 40 years. What is the value of this inheritance today if the applicable discount rate is 7.3 percent, compounded monthly

Answer 1

The value of this inheritance is $78,192.28

Explanation:

The monthly payments Sara will receive starting today for next 40 years is $500.

Annual Interest Rate = 7.3%

Monthly Interest Rate = Annual Interest Rate/12

=7.3/12

Monthly Interest Rate = 0.6083%

Present Value = $500 + $500/1.006083 + $500/1.006083^2 + $500/1.006083^3 + ... + $500/1.006083^479

Present Value = $500 * 1.006083 * (1 - (1/1.006083)^480) / 0.006083

Present Value = $500 * 156.39156

Present Value = $78,192.28

Thus, the value of this inheritance is $78,192.28