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 five more years. Assuming a 10% annual interest rate, what is the value of this trust?

Answer 1

Answer:

PV= $620,921.32

Explanation:

Giving the following information:

Cash flow (Cf)= $100,000

Interest rate (i)= 7.25%

First, we need to calculate the value of the investment at the moment of the first payment (five years from now). To calculate the present value we need to use the following formula:

PV= Cf / i

PV= 100,000 / 0.1

PV= $1,000,000

Now, the value today:

PV= FV / (1 + i)^n

PV= 1,000,000 / (1.1^5)

PV= $620,921.32