Martin wants to provide money in his will for an annual bequest to whichever of his...

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $ 7000 in the first year, and will grow by 5 % per year, forever. If the interest rate is 11 %, how much must Martin provide to fund this bequest? A. $ 93333 B. $ 58333 C. $ 140000 D. $ 116667

Solutions

Expert Solution

Information provided:

Payment in the first year= $7,000

Growth rate= 5%

Interest rate= 11%

The present value of growing perpetuity is calculated using the below formula:

Present value of growing perpetuity= Payment at year 1/ Interest rate- growth rate

= $7,000/ 0.11- 0.05

= $7,000/ 0.06

= $116,667.

The answer is option d.

Therefore, Martin must provide $116,667 o fund the bequest.

jeff jeffy answered 11 months ago

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