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 percent annual interest rate, what is the value of this trust?
A)$620,921
B)$683,013
C)$1,000,000
D)$1,100,000

Question

Quizplus · Accepted Answer

Using the formula for the present value of perpetuity:
PV = C/i, where PV is the present value, C is the cash flow per period (in this case, $100,000 per year), and i is the interest rate.

To find the present value in this case, we need to discount the cash flows back to the present. Since the first payment will not occur for 5 years, we need to discount the cash flows back 5 years.

PV = $100,000 / 0.10 = $1,000,000 (present value of cash flows starting in Year 6)
PV of the trust = PV / (1 + 0.10)^5 = $683,013.

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