Aunt Clara has promised to leave you $200 a year starting next year and have it increase at 6% a year thereafter

Finance Aug 05, 2020

Aunt Clara has promised to leave you $200 a year starting next year and have it increase at 6% a year thereafter. The payments are expected to go on indefinitely. How much has Aunt Clara left you if your opportunity cost is 10 percent?

$2,500

$3,000

$4,000

$5,000

$6,000

Expert Solution

Computation of Amount Aunt Clara has left for you:

Amount Aunt Clara has left = Amount Left for Next Year / (Opportunity Cost - Growth Rate )

= $200 / (10% - 6% )

= $200 / 4%

Amount Aunt Clara has left = $5,000

So, the correct option is 4th "$5,000".

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