Question

You want to endow a scholarship that will pay $ 11 comma 000 per year​ forever, starting one year from now. If the​ school's endowment discount rate is 9 %​, 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?

Answer 1

You must donate $ 123455.5556 to endow the scholarship.

If the endow it now but it makes the first award to a student 10 years from today, then the amount to donate will be $ 56842.36731.

Step-by-step explanation:

if the scholarship one year from now, the donation amount would be:

present fund amount = (scholarship amount)/(discount rate)

= $11,000/9%

= $ 123455.5556

Therefore, you must donate $ 123455.5556 to endow the scholarship.

if the scholarship start in 10 years from today, the amount is:

scholarship amount in 10 years = (amount of scholarship today)/[(1+9%)^9]

= $ 123455.5556/(1+9%)^9

= $ 56842.36731

Therefore, if the endow it now but it makes the first award to a student 10 years from today, then the amount to donate will be $ 56842.36731.