Question

after many years teaching finance at sfu, allen wants to establish a scholarship to offer four $1,000 awards each year to students whose performance is excellent in finance courses. if the university can achieve a 3% effective interest rate, how much does allen need to provide the scholarship fund today (closest estimate)?

Answer 1

Allen needs to invest approximately $133,333.33 today to provide four $1,000 scholarship awards each year at an effective interest rate of 3%.

Step-by-step explanation:

The question asks about the present value that Allen needs to invest today to provide four $1,000 awards each year indefinitely, assuming a 3% effective interest rate. To calculate this present value, we would use the formula for the perpetuity, which is PV = PMT / i, where PV is the present value, PMT is the annual payment, and i is the interest rate. In Allen's case, the PMT is $4,000 (four awards of $1,000 each), and the annual interest rate i is 3%. Therefore, the present value PV that Allen must provide to the scholarship fund is calculated as $4,000 divided by 0.03, which equals approximately $133,333.33.