Question

On completion of her introductory finance​ course, Marla Lee was so pleased with the amount of useful and interesting knowledge she gained that she convinced her​ parents, who were wealthy alums of the university she was​ attending, to create an endowment. The endowment is to allow three needy students to take the introductory finance course each year in perpetuity. The guaranteed annual cost of tuition and books for the course is $1,100 per student. The endownment will be created by making a single payment to the university. The university expects to earn exactly 4% per year on these funds.

A)  How large an initial single payment must​ Marla's parents make to the university to fund the​ endowment ? round to the nearest dollar

B) What amount would be needed to fund the endowment if the university could earn 6% rather than 4% per year on the funds? round to the nearest dollar

Answer 1

A) the downpayment wil be for 82,500 dollars at 4% interest yield

B) the downpatment will be for 55,000 if the interest yield is 6% rathen than 4%

Step-by-step explanation:

The cost of the course is 1,100

The endownment will be for three students so:

3,300

Now we calculate the value of the perpetuity

The perpetuity is an annuity on which time goes to infinity, this leaves the formula like this:

Perpetuity = C/r

considering the interest rate will be of 4%

3,300 / 0.0.4 = 82,500

If the interest yield were 6% then:

3,300/0.06 = 55,000