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 a 10 percent annual interest rate, what is the value of this trust?
A)$683,013
B)$751,315
C)$1,000,000
D)$1,100,000

Question

Quizplus · Accepted Answer

We can use the formula for the present value of a perpetuity:

PV = Payment / Interest rate

Plugging in the given values, we get:

PV = 100,000 / 0.10 = $1,000,000

However, this is the present value four years from now, so we need to discount it back to present value using the formula:

PV = FV / (1 + r)^n

Where FV is the future value, r is the interest rate, and n is the number of years. Plugging in the values, we get:

PV = 1,000,000 / (1 + 0.10)^4 = $683,015.

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