Question

Your grandparents would like to establish a trust fund that will pay you and your heirs $230,000 per year forever with the first payment 10 years from today. If the trust fund earns an annual return of 4.5 percent, how much must your grandparents deposit today?

Answer 1

Answer:

$3,438,289

Explanation:

First we need to calculate the future value of investment after 10 years.

A fix payment for indefinite period of time is a perpetuity payment. It will be value using perpetuity formula

Value of investment after 10 years = Yearly cash flow / interest rate

Value of investment after 10 years = $230,000 / 4.5% = $5,111,111

Now we need to discount this value to calculate the amount of deposit required today.

Present value = Future value x ( 1 + r )^-n

Today's value = $5,111,111 x ( 1 + 4.5% )^-9 = $3,438,289