Question

You plan to set up an endowment at your alma mater that will fund $207,000 of scholarships each year indefinitely. If the principal (the amount you donate) can be invested at 6.0 percent, compounded annually, how much do you need to donate to the university today, so that the first scholarships can be awarded beginning one year from now

Answer 1

Answer: $3,450,000

Step-by-step explanation:

You need to donate the present value of the indefinite amount today so that the first scholarships can start to be awarded in the next year.

An indefinite amount is known as a perpetuity and the present value of a perpetuity is:

= Perpetuity / Interest rate to be compounded

= 207,000 / 6%

= $3,450,000