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Your grandparents would like to establish a trust fund that will pay you and your heirs $215,000 per year forever with the first payment one year from today. If the trust fund earns an annual return of
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Your grandparents would like to establish a trust fund that will pay you and your heirs $215,000 per year forever with the first payment one year from today. If the trust fund earns an annual return of 4.2 percent, how much must your grandparents deposit today?

User Adarsh H S
by
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1 Answer

3 votes

Answer:

They should invest $5,119,047.619 today.

Step-by-step explanation:

The trust fund will pay a fixed amount forever thus it is a perpetuity. The value of perpetuity or Price of perpetuity is the amount that the perpetuity is worth in today's terms based on the cash flows it will generate in future.

The formula for the value or price of perpetuity is,

P0 or V = Cash Flow / r

Thus,

P0 or V = 215000 / 0.04 = $5,119,047.619

User Hans Glick
by
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