Question

Perry wants to set-up a scholarship at Ryerson University that will pay $10,000 a year, forever, starting one year from today. If interest rates are 6%, how much money does Perry need to give Ryerson University today?

Answer 1

To set up the scholarship, Perry needs to give Ryerson University $9,434.58 today.

Step-by-step explanation:

To calculate the amount of money Perry needs to give Ryerson University today for setting up a scholarship, we can use the concept of present value. The present value (PV) of a future cash flow is the value of that cash flow in today's dollars. In this case, the cash flow is $10,000 a year, forever, starting one year from today, and the interest rate is 6%.

The formula to calculate present value is:

PV = CF / (1 + r)^n

Where PV is the present value, CF is the cash flow, r is the interest rate, and n is the number of periods.

Plugging in the values, we have:

PV = $10,000 / (1 + 0.06)^1 = $9,434.58

Therefore, Perry needs to give Ryerson University $9,434.58 today to set up the scholarship.