Question

You are planning to fund a scholarship at Kent State that will grant $50,000 every year in perpetuity. There is an investment fund offering 6.25% per year. How much upfront investment would it cost you to fund the account?

Answer 1

An upfront investment of $800,000 is needed to fund a $50,000 annual perpetuity scholarship with an investment returning 6.25% annually by using the present value of a perpetuity formula: PV = C / r.

Step-by-step explanation:

To determine how much upfront investment would be required to fund a $50,000 scholarship in perpetuity with an investment fund that offers a 6.25% annual return, we can use the formula for the present value of a perpetuity. The formula is PV = C / r, where PV is the present value, C is the annual cash flow, and r is the annual interest rate (expressed as a decimal).

In this case, C is $50,000 and r is 0.0625. Plugging these values into the formula, we get:

PV = $50,000 / 0.0625

PV = $800,000

Therefore, an upfront investment of $800,000 is required to fund a perpetual scholarship of $50,000 per year at a 6.25% return rate.