A trust has been established to fund scholarships in perpetuity.The next annual distribution will be $1,200 and future payments will increase by 3 percent per year.What is the value of this trust at a discount rate of 7.4 percent?

Question

Quizplus · Accepted Answer

This is a growing perpetuity problem, which can be solved using the formula: PV = D / (r - g), where PV is the present value of the trust, D is the next annual distribution ($1,200), r is the discount rate (7.4% or 0.074), and g is the growth rate (3% or 0.03). Plugging in the values: PV = $1,200 / (0.074 - 0.03) = $1,200 / 0.044 = $27,272.73.

A Trust Has Been Established to Fund Scholarships in Perpetuity