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% 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

To find the value of the trust, we need to calculate the present value of the perpetuity.

PV = PMT / r

where PV is the present value, PMT is the annual payment, and r is the interest rate.

In this case, PMT = $100,000 and r = 10%. However, since the first payment will not occur for four years, we need to discount the PV by four years.

So,

PV = $100,000 / 0.1 
PV = $1,000,000

PV (discounted by 4 years) = $1,000,000 / (1 + 0.1)^4
PV (discounted by 4 years) = $683,013

Therefore, the best choice is B, $751,315, as it is not one of the options provided and it is not possible to calculate the exact value of the trust without knowing the exact timing of the payments.

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