Asked by Crissy Hogue on Jun 03, 2024
Verified
You would like to establish a trust fund that will provide $50,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate of return is only 2.75%. How much money must you deposit today to fund this gift for your heirs?
A) $1,333,333.33
B) $1,375,000.00
C) $1,425,000.00
D) $1,666,666.67
E) $1,818,181.82
Trust Fund
A legal entity set up to hold property or assets for the benefit of another party, often managed by a trustee.
Rate of Return
The upward or downward adjustment in an investment's value through a defined span, represented as a fraction of the investment's initial expense.
- Become acquainted with financial mechanisms or contracts that conform to the characteristics of a perpetuity.
- Assess the worth of growing annuities and perpetuities using given financial formulas.
Verified Answer
VA
Victoria AjegwuJun 10, 2024
Final Answer :
E
Explanation :
To find out how much money must be deposited today to fund a perpetual gift of $50,000 a year at a 2.75% rate of return, you use the formula for the present value of a perpetuity: PV = PMT / i, where PV is the present value (the amount of money you need to deposit today), PMT is the annual payment ($50,000), and i is the annual interest rate (2.75% or 0.0275 in decimal form). Plugging in the numbers: PV = $50,000 / 0.0275 = $1,818,181.82.
Learning Objectives
- Become acquainted with financial mechanisms or contracts that conform to the characteristics of a perpetuity.
- Assess the worth of growing annuities and perpetuities using given financial formulas.
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