Question

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $ 4 comma 000$4,000 in the first year, and will grow by 77% per year, forever. If the interest rate is 1010%, how much must Martin provide to fund this bequest? A. $ 133 comma 333$133,333 B. $ 66 comma 667$66,667 C. $ 160 comma 000$160,000 D. $ 106 comma 667$106,667

Answer 1

Payment in Year 1 = $4,000

Growth Rate of Payment = 7%

Interest Rate = 10%

Present Value of Growing Perpetuity = C₁/(r - g)

Present Value = 4000/(0.10 - 0.07)

Present Value = $133,333