Your grandparents would like to establish a trust fund that will pay you and your heirs $205,000 per year forever with the first payment 12 years from today. If the trust fund earns an annual return of 4 percent, how much must your grandparents deposit today?

PV= $3,201,059.88

Explanation:

Giving the following information:

Annual cash flow= $205,000

First payment= 12 years from today

Interest rate= 4%

First, we need to calculate the value of the account 12 years from today. We need to use the following formula:

FV= Cf/ i

FV= 205,000 / 0.04

FV= $5,125,000

Now, the amount to be deposited today:

PV= FV / (1 + i)^n

PV= 5,125,000 / (1.04^12)

PV= $3,201,059.88