Question

You would like to establish a trust fund that will provide $50,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate of return is only 2.75%. How much money must you deposit today to fund this gift for your heirs?

Answer 1

Answer:

$1,818,181.81

Explanation:

Data provided:

Amount that will be provided a year = $50,000

Expected rate of return = 2.75%

Now,

The Present value of perpetuity is given as:

Present value of perpetuity = $\frac{\textup{Annual return}}{\textup{Expected rate of return}}$

on substituting the respective values, we get

Present value of perpetuity = $\frac{\textup{50,000}}{\textup{0.0275}}$

or

Present value of perpetuity = $1,818,181.81

Hence,

The amount that must be deposited today to fund this gift is $1,818,181.81