Question

A father wants to create a trust fund for his daughter. He would like the fund to distribute $20,000 per year for 20 years. The father will set aside all of the funds for the trust today in an account that pays 8% APR on average. The first withdrawal from the trust will be in exactly 25 years. The funds in the trust will remain in the investment account as they are withdrawn. How much should the father set aside today?

Answer 1

Present Value required after 25 years =  

where r is the rate of Return for compounding period = 8%

n is the no of compounding period 20 years

=

= 196,362.948162

Amount required after 25 years $196,362.948162

Now, this will become the future value from today's prespective.

Future Value =

r =0.08

n =25

196,362.948162 =

196,362.948162 = Periodic Payment * 73.1059399506

Periodic Payment = 196,362.948162 / 73.1059399506

Periodic Payment = 2686

He needs to set aside 2686 per year for 25 years.