In: Finance
In her will, your aunt set up a trust that is required to pay you the sum of $5,000 a year forever with payments starting immediately. However, the news is better. She has specified that this $5,000 should grow at 5% per year. Given an interest rate of 12%, what is the PV of the inheritance? Please include formulas used. Thanks
The present value of inheritance
= cash flows at the end of year 1/(interest rate -growth rate)
= 5000(1+.05)/7%
= $75000
Present value of the property is $75,000.