Final answer:
To endow a scholarship that will pay a certain amount annually, one needs to calculate the required endowment using the perpetuity formula, considering the annual payment desired and the expected interest or return rate. This practice is essential in the domain of Business, particularly related to funding and managing higher education scholarships.
Step-by-step explanation:
The completion of the phrase 'You want to endow a scholarship that will pay...' typically involves calculating the amount of money needed to fund the scholarship in perpetuity. This falls under the subject of financial planning within the area of Business, specifically in relation to higher education funding and management. In this case, a student or institution may be looking to establish a scholarship for college students, which involves understanding the principles of endowments, interest rates, and sustainable payout strategies.
For example, if someone wishes to endow a scholarship that provides $12,000 annually, and they assume an average interest or return rate of 4.2%, they would use the formula for a perpetuity: PV = PMT / i, where PV is the present value of the endowment, PMT is the annual payment, and i is the interest rate. In this scenario, the calculation would be PV = $12,000 / 0.042, which would result in a required endowment of $285,714.29 to perpetually fund the scholarship.
Such financial decisions are critical in supporting education and ensuring that scholarships can be funded over the long term without depleting the principal amount. With rising college expenses and the need for programs like the Pell Grant, endowments play a vital role in helping students manage the costs associated with their college education.