You would like to establish a trust fund to provide $140,000 a year forever for your heirs. The expected rate of return is 5.45 percent. How much money must you deposit today to fund this gift

The amount of money that must be deposited to day to fund this gift is $2,568,807.34.

Explanation:

In order to determine this, we employ the formula for calculating the present value of a perpetuity since the fund is meant to provide $140,000 a year forever.

A perpetuity can be described as payments that is made or received periodically forever or indefinitely.

The formula for calculating the present value of a perpetuity is given as follows:

PV = M / i   (1)

Where;

PV = the amount of money that must be deposited today = ?

M = yearly amount to receive forever = $140,000

i = expected rate of return = 5.45, or 0.0545

Substituting the values into equation (1), we have:

PV = $140,000 / 0.0545

PV = $2,568,807.34

Therefore, the amount of money that must be deposited to day to fund this gift is $2,568,807.34.

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