Question
In: Accounting
Big Sky Cancer Research Institute just received a $4 million gift to cover the salary for...
Big Sky Cancer Research Institute just received a $4 million gift to cover the salary for a permanent research scientist to study Hodgkin’s disease, in perpetuity. What would be the required rate of return on the investment if the position paid an annual salary of a. $175,000 per year? b. $200,000 per year? c. $225,000 per year?
Solutions
Expert Solution
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a.
Present value of a perpetuity = Annual payment/Discount rate
$ 4,000,000 = $ 175,000/ Discount rate
Discount rate = $ 175,000/$ 4,000,000
= 0.04375 or 4.38 %
b.
Present value of a perpetuity = Annual payment/Discount rate
$ 4,000,000 = $ 200,000/ Discount rate
Discount rate = $ 200,000/$ 4,000,000
= 0.05 or 5 %
c.
Present value of a perpetuity = Annual payment/Discount rate
$ 4,000,000 = $ 225,000/ Discount rate
Discount rate = $ 225,000/$ 4,000,000
= 0.05625 or 5.63 %
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