Question

Mr. Michael Scott, a regional manager of a paper company, wants to support his two grand kids when they grow up. He wants to set up a fund that will pay each of them $5000 per year forever starting when they turn 18. If one of the grandchildren is 17 and the other is 12, what total amount does he need to invest today? Assume an investment return of 6% per year.

Answer 1

The total investment required is $137,363.06

Step-by-step explanation:

Giving the following information:

Perpetual annuitiy= $5,000 each

Interest rate= 0.06

First, we need to calculate the present value of the annuity:

PV= Cf/ i

PV= 5,000/0.06= $83,333.33

To fund a perpetual annuity for each grandkid, the value of the investment when each of them turns 18 is $83,333.33.

Now, we need to calculate the investment today, to reach $83,333.33 for each one.

PV= FV/(1+i)^n

Investment 1:

PV= 83,333.33 / (1.06)= $78,616.35

Investment 2:

PV= 83,333.33 / (1.06^6)= $58,746.71

The total investment required is $137,363.06