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 one year from today. If the trust fund earns an annual return of 2.5 percent, how much must your grandparents deposit today

Answer 1

My grandparents deposit $5200000 today.

Step-by-step explanation:

The annual return earned by trust fund = $2.5 percent

It is given that the trust will pay annually a certain amount for infinite period so annual pay = $130000 per year.

Now we have to calculate the invested or deposited amount by grandparents today.

The present value of future constant annual payment over infinite period = (P/A, i%, n = infinity) or 1 / i%

The amount that should be deposited today :

`= 130000 * (1)/(2.5 \ percent) \\= 5200000`