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 $ 9 comma 000 in the first​ year, and will grow by 5​% per​ year, forever. If the interest rate is 10​%, how much must Martin provide to fund this​ bequest?

Answer 1

Present Value= $180,000

Step-by-step explanation:

Giving the following information:

The bequest will provide $9,000 in the first​ year and will grow by 5​% per​ year, forever.

Interest rate= 10%

To calculate the present value of this perpetual annuity with a growing rate, we need to use the following formula:

PV= Cf/ (i-g)

Cf= cash flow= 9,000

i= 0.10

g= 0.5

PV= 9,000/ (0.10 - 0.05)= $180,000