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% 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

We can use the formula for present value of a perpetuity, which is PV = Annual Payment / Interest Rate. Plugging in the given values, we get PV = 100,000 / 0.08 = 1,250,000. However, since the first payment is not for 4 years, we need to discount this value by the 4-year future value factor, which is 1.360. Therefore, the value of the trust is PV x FVF = 1,250,000 x 1.360 = $1,698,000. But we are asked for the present value, so we need to discount this amount by the 8% interest rate for 4 years, which gives us PV = FV / (1 + r)^n = 1,698,000 / (1 + 0.08)^4 = $992,290. Therefore, the best choice is B.

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