Question

. You just inherited a trust that will pay you $100,000 per year in perpetuity. However, the first payment will not occur for exactly four more years. Assuming an 8 percent annual interest rate, what is the value of this trust?

Answer 1

Answer:

Present Value= $918,787.32

Explanation:

Giving the following information:

You just inherited a trust that will pay you $100,000 per year in perpetuity.

The first payment will not occur for exactly four more years.

Interest rate= 8%

First, we need to determine the value of the perpetual annuity in 4 years. Then, we calculate the value today.

Present value in four years:

PV= Cf/i

Cf= cash flow

PV= 100,000/0.08= $1,250,000

Now, using the following formula, we calculate the value today.

PV= FV/(1+i)^n

PV= 1,250,000/1.08^4

PV= $918,787.32