Question

Good Guy Foods wants to establish a trust fund that will provide $125,000 in scholarships each year for needy students. The trust fund is expected to earn a fixed 7.25 percent rate of return. How much money does the firm need to contribute to the fund assuming that only the interest income is to be distributed? a. $1,687,450 b. $1,478,023 c. $1,333,333 d. $1,724,138

Answer 1

Good Guy Foods

The amount that the firm needs to contribute to the fund, assuming that only the interest income is to be distributed is:

d. $1,724,138

Step-by-step explanation:

a) Data and Calculations:

Distributable Trust Fund = $125,000

Rate of interest or return = 7.25%

The distributable trust fund is a product of total trust fund multiplied by the rate of return.

The total trust fund = $125,000/7.25%

= $125,000/0.0725

= $1,724,138

Check:

7.25% of $1,724,138 = $125,000

b) Good Guy Foods needs to contribute $1,724,138 in funds that will earn 7.25% annually and equal the scholarship amount of $125,000 annually.