Question

You plan to set up an endowment at your alma mater that will fund $209,000 of scholarships each year indefinitely. If the principal (the amount you donate) can be invested at 5.0 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

To fund $209,000 of scholarships each year indefinitely starting one year from now, you would need to donate $4,180,000 to the university today.

Step-by-step explanation:

To calculate the amount you need to donate to the university today, we can use the formula for the present value of an annuity. The formula is:

PV = CF / r

Where PV is the present value, CF is the cash flow or the amount of scholarships per year, and r is the interest rate. In this case, CF is $209,000 and r is 5.0%. Plugging in these values, we get:

PV = $209,000 / 0.05 = $4,180,000

So, you would need to donate $4,180,000 to the university today in order to fund $209,000 of scholarships each year indefinitely starting from one year from now.