An investment set up as a perpetual trust provides an annual disbursement of $25,000 for the first 20 years and an undetermined amount from year 21. If the trust is set up with $500,000, determine the disbursement that can be made from year 21 through infinity if the interest earned is 6% per year.

Question

Quizplus · Accepted Answer

The trust earns 6% annually, so it generates $30,000 per year ($500,000 * 0.06). For the first 20 years, $25,000 is disbursed annually, leaving $5,000 to accumulate. After 20 years, the accumulated amount will be $500,000, allowing a perpetual disbursement of $500,000 * 0.06 = $30,000. Adding the $11,031 accumulated from the $5,000 surplus over 20 years, the total disbursement from year 21 is $41,031.

An Investment Set Up as a Perpetual Trust Provides an Annual