Question

Your grandparents would like to establish a trust fund that will pay you and your heirs $130,000 per year forever with the first payment 11 years from today. If the trust fund earns an annual return of 2.5 percent, how much must your grandparents deposit today?

Answer 1

If the trust fund earns an annual return of 2.5 percent, Your grandparents must deposit today $4,062,231

Step-by-step explanation:

In order to calculate how much must your grandparents deposit today, first we would have to calculate according to the information given the Value of fund required at end of year 10.

Hence, Value of fund required at end of year 10 = $130,000 / 2.5% = =$5,200,000

Therefore, the Value of fund required today at 2.5% and N = 10 = $5,200,000 / (1 + 2.5%)^10

= $4,062,231

If the trust fund earns an annual return of 2.5 percent, Your grandparents must deposit today $4,062,231

Answer 2

$5,200,000

Step-by-step explanation:

Amount that grandparents must deposit today = Regular amount / Rate of interest

= $130,000 / 2.5%

=$130,000/0.025

= $ 5,200,000

Therefore the amount that grandparents must deposit today is $5,200,000