If Lisa Hamilton wants to fund a scholarship that would pay$12,500 per year forever at...

If Lisa Hamilton wants to fund a scholarship that would pay $12,500 per year forever at GSU, how much would Lisa have to deposit today if she wanted the scholarship to start paying six (6) years from today? Assume the endowment could earn 6.25% p.a. interest forever.

Expert Solution

- Formula for Present Value of perpetuity Payment = Annual Cashflow at year end/Interest Rate

As while calculating the Present value we take Annual cashflow at year end which makes the Present Value at year end 5 as Cashflows starts at year end 6. Then further we will will discount the present Value at year 5 with 5 year discounting rate to arrive it at today.

Calculating the Present Value today:-

where, r = Interest rate = 6.25%

n = no of years of discounting = 5

Present Value = $147,701.63

So, amount Lisa have to deposit today is $147,701.63

jeff jeffy answered 2 years ago

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