1a)

You just inherited a trust that will pay you $100,000 per year in perpetuity. However, the first payment will not occur for exactly five more years. Assuming a 10 percent annual interest rate, what is the value of this trust?

Multiple Choice

$1,000,000

$620,921

$683,013

$1,100,000

1b) You would like to have enough money saved to receive a $50,000 per year perpetuity after retirement. How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start on the day of your retirement. The annual interest rate is 8 percent.)

Multiple Choice

$500,000

$675,000

$625,000

$1,000,000

1c) If the present value of $480 to be paid at the end of one year is $400, what is the one-year discount factor?

Multiple Choice

0.20

1.00

1.20

0.8333