Suppose the interest rate is always 5.3%. Your grandparents deposit $542,832 at a bank for you. The bank agrees that starting 15 years from now you and

Suppose the interest rate is always 5.3%. Your grandparents deposit $542,832 at a bank for you. The bank agrees that starting 15 years from now you and or offspring can withdraw a fixed amount of cash each year forever. Find the amount of the yearly cash flow.

Expert Solution

Calculation of perpetual annual cash flow:

First we shall calculate the value of deposit at the end of year 14th(last year before Annual cash inflow).

Future value = Amount deposited(1+Interest rate)^no. of years

= $542,832(1+0.053)^14

= $542,832*2.0606166

= $1,118,568.64

This amount is present value of annual cash flow, thus

Present value = Perpetual annual cash flow/Interest rate

$1,118,568.64 = Perpetual cash flow/0.053

Perpetual cash flow = $1,118,568.64*0.053

= $59,284.14

Thus, amount of yearly cash flow is $59,284.14.

Nabeel answered 1 year ago

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