Question

You would like to establish a trust fund that would pay annual payments to your heirs of $100,000 a year forever. You expect the trust fund to earn an average return of 6.5 percent. How much do you need to deposit into this trust fund today to achieve your goal? Group of answer choices

Answer 1

The amount to deposited = $1,538,461.54

Step-by-step explanation:

A fund that pays a fixed amount for forever is an example of a perpetuity. Hence, the amount to be deposited today is the present value of the perpetuity.

This given below as follows:

PV = A × 1/r

PV - present value of perpetuity

r- Interest rate = 6.5%. A- annual cash flow - 100,000

PV = 100,000 × 1/0.065= 1,538,461.54

The amount to deposited = $1,538,461.54