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24 April, 19:49

Your grandparents would like to establish a trust fund that will pay you and your heirs $225,000 per year forever with the first payment one year from today. If the trust fund earns an annual return of 4.4 percent, how much must your grandparents deposit today?

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  1. 24 April, 23:45
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    They must deposit $5,113,636.36.

    Explanation:

    Giving the following information:

    Cash flow = $225,000

    Interest rate = 4.4 percent

    To determine the amount to be deposited today, we need to use the perpetual annuity formula:

    PV = Cf/i

    Cf = cash flow

    PV = 225,000/0.044

    PV = $5,113,636.36

    They must deposit $5,113,636.36.
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