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?
A)$918,787
B)$992,290
C)$1,000,000
D)$1,250,000

Question

Quizplus · Accepted Answer

To find the value of the trust, we need to calculate the present value of the perpetual annuity. Since the first payment is in four years, we have to discount the cash flows back to the present day using the given interest rate.

Using the perpetuity formula, the present value of the trust can be calculated as:

Present value = Annual payment amount / Discount rate
Present value = $100,000 / 0.08
Present value = $1,250,000

Now, we need to discount this value back to the present day:

PV = FV / (1 + r)^n

where PV is the present value, FV is the future value, r is the annual interest rate, and n is the number of years.

PV = $1,250,000 / (1 + 0.08)^4
PV = $992,290

Therefore, the value of the trust is $992,290. The best choice is B.

You Just Inherited a Trust That Will Pay You $100,000