2 You are a trust fund baby but you cannot touch your money

2.  You are a trust fund baby, but you cannot touch your money until you are 30.  You are now 21 and want to plan for your future based on the current value of your trust fund.  The guaranteed payout of your trust is $25,000.  What is that money worth to you today, if you assume an annual inflation rate of 3% compounded annually?

Solution

Here the future value (FV) is $25,000

Number of year = n = 30 – 21 = 9

Inflation rate (r) = 0.03

Present value (PV) =?

By the formula,

FV = PV × (1 – r) ^n

25,000 = PV × (1 + 0.03) ^9

25,000 = PV × (1.03 ^9)

25,000 = PV × 1.3047731

PV = 25,000 / 1.3047731

     = 19,160.42

Answer: The required money on today’s date is $19,160.42.