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bija089 [108]
3 years ago
14

You just inherited a trust that will pay you $100,000 per year in perpetuity. However, the first payment will not occur for exac

tly five more years. Assuming a 10% annual interest rate, what is the value of this trust?
Business
1 answer:
allsm [11]3 years ago
8 0

Answer:

PV= $620,921.32

Explanation:

Giving the following information:

Cash flow (Cf)= $100,000

Interest rate (i)= 7.25%

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

PV= Cf / i

PV= 100,000 / 0.1

PV= $1,000,000

<u>Now, the value today:</u>

PV= FV / (1 + i)^n

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

PV= $620,921.32

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