Question

In: Finance

You want to create an endowment to fund a football scholarship, which pays $20,000 per year,...

You want to create an endowment to fund a football scholarship, which pays $20,000 per year, forever, how much money must be set aside today if the rate of interest is 4.7%?

a.

$682,477

b.

$517,698

c.

$1,000,000

d.

$736,857

e.

$425,532

Solutions

Expert Solution

Information provided:

Annual payment= $20,000

Interest rate= 4.7%

The question is solved by computing the present value of perpetuity.

Present value of the perpetuity payment each year= annual payment/discount rate

                                                                                                 = $20,000/ 0.047

                                                                                                 = $425,531.9149  $425,532.

Hence, the answer is option e.

In case of any query, kindly comment on the solution


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