Question

1.Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 6 percent interest?

Answer 1

Answer:

$1,666,666.67

Explanation:

This is a time value of money(TVM) question specifically, a perpetuity.

Use the formula for present value of perpetuity to solve it. It is as follows;

PV or perpetuity = Recurring cashflow / interest rate

PV = CF / r

Recurring annual cashflow ; CF = 100,000

rate; r = 6% or 0.06 as a decimal

PV = 100,000 / 0.06

PV = 1,666,666.667

Therefore, your parents will deposit $1,666,666.67 today