Question

You would like to establish a trust fund to provide $140,000 a year forever for your heirs. The expected rate of return is 5.45 percent. How much money must you deposit today to fund this gift

Answer 1

Answer:

The amount of money that must be deposited to day to fund this gift is $2,568,807.34.

Explanation:

In order to determine this, we employ the formula for calculating the present value of a perpetuity since the fund is meant to provide $140,000 a year forever.

A perpetuity can be described as payments that is made or received periodically forever or indefinitely.

The formula for calculating the present value of a perpetuity is given as follows:

PV = M / i  ............................. (1)

Where;

PV = the amount of money that must be deposited today = ?

M = yearly amount to receive forever = $140,000

i = expected rate of return = 5.45, or 0.0545

Substituting the values into equation (1), we have:

PV = $140,000 / 0.0545

PV = $2,568,807.34

Therefore, the amount of money that must be deposited to day to fund this gift is $2,568,807.34.