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

Question

Business

Brent

8 December, 15:21

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

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Answers (1)

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Isabella Stewart · Answer 1

The amount to deposited = $1,538,461.54

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