A charitable foundation has $500,000 invested in an account that earns 7%. The foundation has promised...
A charitable foundation has $500,000 invested in an account that earns 7%. The foundation has promised to begin making annual payments to beneficiaries in one year, and the first payment will be $25,000. The foundation has promised that future payments will grow at a constant rate forever. At what rate can the foundation afford to increase payments assuming that it makes no additional deposits into the account?
a. 0%; it can't afford to increase payments forever without adding more money to the account.
b. 1%
c. 2%
d. 3%
Homework Answers
We know that growth rate=return-first payment/invested
amount=7%-25000/500000=2.0000%
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