Question

A generous benefactor to a local symphony plans to make a one-time endowment that would provide the ballet with $150,000 per year into perpetuity. The rate of interest is expected to be 6 percent for all future time periods. How large must the endowment be?

Answer 1

The right answer is "$2,500,000".

Step-by-step explanation:

The given values are:

Interest rate,

= 6%

i.e.,

= 0.06

Perpetuity per year

= $150,000

Now,

The present value will be:

=
`(Perpetuity)/(Interest \ rate)`

On substituting the estimated values, we get

=
`( 150,000)/(0.06)`

=
`2,5 00,00 0` ($)