Question

An alumnus of West Virginia University wishes to start an endowment that will provide scholarship money of $40,000 per year beginning in year 5 and continuing indefinitely. The donor plans to give money now and for each of the next 2 years. If the size of each donation is exactly the same, the amount that must be donated each year at i = 8% per year is closest to:___.

a) $190.820.
b) $122.280.
c) $127.460.
d) $132.040.

Answer 1

A

Step-by-step explanation:

Present value of a perpetuality = amount / interest rate

= $40,000 / 0.08 = $500,000

Let D denote denote denotions

`D + (D)/(1 + 0.8) + (D)/(1.08^(2) ) = $500,000`

D = $190.820.