Answered

Your great grandfather left you a trust will pay you an annual payment of $200 today but the annuity will grow at an annual rate of 2% every year starting next year into perpetuity. Assume the interest rate is 6%, how much is this trust worth today?

Answer :

TomShelby

Answer:

The annuity is worth $5,000 today

Explanation:

We solve using the growing perpetuity formula for present value:

[tex]Principal = \frac{C}{r - g} \\Where: \\$r = interest rate\\g = grow rate[/tex]

r = 0.06

g = 0.02

C = $200

$200/(0.06-0.02) = 200/.04 = $5,000

Answer:

$5000

Explanation:

The formular to be used is the growing perpetuity formula

PV= C/r-g

from the given information

PV=200/0.06-0.02

$5000

Other Questions