Question

John decides to make arrangements so that his friend Jason will be financially stable in the foreseeable future. To this end, john would like to set up a trust fund that will give Jason a yearly allowance of $50,000 adjusted for inflation every year. This trust fund would be set up in 2020 and the allowances would come at the beginning of every year (2020 included). The last allowance would come in 2040. At this point, the fund would run out of money and Jason would have to find a real job.

If the expected inflation for the next 20 years is 2.5% and the interest rate on john investments is 10%, how much money should be deposited in the fund today?

Answer 1

In this case, Money is to be deposited is the present value of an ordinary due growing with rate equal to inflation rate. So,

Initial withdrawal=R=$50000

Growth rate=g=2.5% or 0.025

Interest rate=i=10% or 0.10

Time period=n=20 years

Deposited to be deposited=PVg*(1+10%)

Where

Deposited to be deposited=5042867383*(1+10%)=$554,715.41