Answer:
$4,349,590.19
Explanation:
An perpetuity is a series of equal cash flows payable for life or foreseeable future
Where the first payment is expected at a date later than year 1 , it is called and advanced perpetuity.
To determine the worth today (present value) for an advanced perpetuity, follow the steps below
Step 1:
Determine the present value (PV ) of the perpetuity as though it is a standard perpetuity
PV of standard perpetuity = A/r
r- 2.3%, A - 120,000
PV = 120,000/ 0.023
= $5,217,391.30 (PV in year 8)
Note The PV formula helps to determine the PV at a year before the first one occurs, so because the first payment is expected in year 9, the PV is ascertained to be in year 8 terms.
Step 2:
Re-discount The PV in step 1 to year 0:
PV in year 0 = Cash flow × (1+r)^(-n)
= 5,217,391.30 × (1.023)^(-8)
= $4,349,590.19
My grandparents should deposit = $4,349,590.19
