Answer:
$4,349,590.19
Explanation:
An perpetuity is a series of equal cash flows payable for life or foreseeable future
<em>Where the first payment is expected at a date later than year 1 , it is called and advanced perpetuity.</em>
To determine the worth today (present value) for an advanced perpetuity, follow the steps below
<em>Step 1:</em>
<em>Determine the present value (PV ) of the perpetuity as though it is a standard perpetuity</em>
<em>PV of standard perpetuity = A/r</em>
<em>r</em>- 2.3%, A - 120,000
PV = 120,000/ 0.023
= $5,217,391.30 (PV in year 8)
<em>Note The PV formula helps to determine the PV at a year before the first one occurs, so because the first payment is expected in year 9, the PV is ascertained to be in year 8 terms.</em>
Step 2:
<em>Re-discount The PV in step 1 to year 0:</em>
PV in year 0 = Cash flow × (1+r)^(-n)
= 5,217,391.30 × (1.023)^(-8)
= $4,349,590.19
My grandparents should deposit = $4,349,590.19
