Question

You want to endow a scholarship that will pay $5,000 per year forever, starting one year from now. If the school's endowment discount rate is 6%, what amount must you donate to endow the scholarship? How would your answer change if you endow it now, but it makes the first award to a student 10 years from today? n the frst case,the amount you must donate today is S(Round to the nearest cent)

Answer 1

Answer a.

Annual payment = $5,000
Interest rate = 6%

Amount donated = Annual payment / Interest rate
Amount donated = $5,000 / 0.06
Amount donated = $83,333.33

In the first case, the amount you must donate today is $83,333.33

Answer b.

Annual payment = $5,000
Interest rate = 6%
First payment is made after 10 years

Value of Scholarship at the end of Year 9 = Annual payment / Interest rate
Value of Scholarship at the end of Year 9 = $5,000 / 0.06
Value of Scholarship at the end of Year 9 = $83,333.33

Amount donated = $83,333.33 / 1.06^9
Amount donated = $49,324.87

In the second case, the amount you must donate today is $49,324.87