Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest wil

Question

3 years ago

11

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest wil

l provide $ 9 comma 000 in the first year, and will grow by 5% per year, forever. If the interest rate is 10%, how much must Martin provide to fund this bequest?

Business

1 answer:

QveST [7] · Answer 1 · 2022-07-05T03:38:58+03:00

Answer:

Present Value= $180,000

Explanation:

Giving the following information:

The bequest will provide $9,000 in the first year and will grow by 5% per year, forever.

Interest rate= 10%

To calculate the present value of this perpetual annuity with a growing rate, we need to use the following formula:

PV= Cf/ (i-g)

Cf= cash flow= 9,000

i= 0.10

g= 0.5

PV= 9,000/ (0.10 - 0.05)= $180,000