Question

Aloma, a university graduate who started a successful business, wants to start an endowment in her name that will provide scholarships to EE students. She wants the scholarship to provide $17.000 per year and expects the first one to be awarded on the day she fulfills the endowment obligation. If Aloma plans to donate $240.000 what rate of return must the university realize in order to award the annual scholarship forever? The rate of return that the university must realize in order to award the annual scholarship forever is %

Answer 1

The question simply requires a rate of return that can pay a perpetual (forever) annuity of $17000 from a principal of $240,000.

This can be computed using excel RATE function

Rate of return = RATE (nper, pmt, pv, [fv], [type], [guess])

• nper - The total number of payment periods. Since number of payments is infinite which is not a valid argument in excel, we can consider a fairly large number here i.e. 999
• pmt - The payment made each period. i.e. 17,000
• pv - The present value, or total value of all loan payments now. which is equal to endowment i.e. -240,000 (negative sign since this is an outflow)
• fv - [optional] The future value, or desired cash balance after last payment. Default is 0.
• type - [optional] When payments are due. 0 = end of period. 1 = beginning of period. In this case since scholarship is paid as soon as endowment is fulfilled, type = 1 (beginning of period)
• guess - [optional] Your guess on the rate. Default is 10%.

Plugging in all the arguments:

Rate of return = RATE (999, 17000, -240000, 0, 1, 10%) = 7.62%

Rate of return that university must realise in order to award the scholarship forever is 7.62%