Your uncle left you an inheritance in the form of a trust. The trust agreement states that you are to receive $750 each year, starting today and continuing for 25 years. What is the value of this inheritance today if the applicable discount rate is 5.8%?

Question

Quizplus · Accepted Answer

This is an annuity due problem since the payments start today. The present value of an annuity due can be calculated using the formula: $PV = P \times \left(\frac{1 - (1 + r)^{-n}}{r}\right) \times (1 + r)$, where $P$ is the payment amount, $r$ is the discount rate per period, and $n$ is the number of periods. Plugging in the values: $PV = 750 \times \left(\frac{1 - (1 + 0.058)^{-25}}{0.058}\right) \times (1 + 0.058)$, we get a present value of approximately $10,339.26, which matches option C.

Your Uncle Left You an Inheritance in the Form of a Trust