Question

In two years, you will receive the 1st payment from an irrevocable trust your grandparents set up. The trust is set up make payments forever. The appropriate discount rate is 2.0%. The 1st payment is for $500 and the payments will increase by 1.0% per year every year thereafter. The present value of all the future trust payments is closest to:

Answer 1

Answer:

$50,000

Explanation:

Note: There is an assumption that the payment is yearly payment & is received at the end of every year

Present Value of Perpetuity = Payment Receivable in 1st year/ (Discount rate - Growth rate)

Present Value of Perpetuity = 500/(2%-1%)

Present Value of Perpetuity = 500/0.01

Present Value of Perpetuity = $50,000

So, the present value of all the future trust payments is closest to $50,000