Question

A generous benefactor to the local ballet plans to make a one-time endowment which would provide the ballet with $150,000 per year into perpetuity. The rate of interest is expected to be 5 percent for all future time periods. How large must the endowment be?

A)

$ 300,000

B)

$1,428,571

C)

$ 750,000

D)

$3,000,000

Answer 1

To provide the local ballet with an annual amount of $150,000 at a 5% interest rate, perpetuity, the benefactor must make an endowment of $3,000,000.

Step-by-step explanation:

To determine how large the endowment must be to provide the local ballet with $150,000 per year into perpetuity at a rate of interest of 5%, we can use the formula for perpetuity:

Perpetuity Value = Annual Cash Flow / Interest Rate

By plugging the values into the formula, we get:

Perpetuity Value = $150,000 / 0.05

Perpetuity Value = $3,000,000

Therefore, the benefactor would need to make an endowment of $3,000,000 to provide the ballet with $150,000 each year indefinitely.