Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest

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Business

Virginia Thompson

25 July, 00:06

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest

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Lyric Proctor · Answer 1

=$66,666.67

Explanation:

The question is asking to determine the amount of money Martin requires to fund his desired bequest in his will.

First, how much is the cash flow martin expects to flow out in the first year of the bequest = $4000

Secondly, what is the expected growth the bequest is to experience yearly and forever = 4% yearly

Thirdly, what is the interest rate expected = 10%

Based on these figures,

The amount to be provided = The Cash flow / (Expected growth rate - Interest rate)

=$4,000 / (0.10-0.04)

=$66,666.67