Question

a school received a one-time endowment that will provide $150,000 per year into perpetuity. the rate of interest expected is 5%. how large is the endowment?

Answer 1

$3,000,000

Step-by-step explanation:

AI-generated answer

To determine the size of the endowment, we can use the concept of present value of a perpetuity.

The present value of a perpetuity is calculated by dividing the cash flow by the interest rate. In this case, the cash flow is $150,000 per year and the interest rate is 5%.

So, the formula to calculate the present value of a perpetuity is:

Present Value = Cash Flow / Interest Rate

Plugging in the values, we have:

Present Value = $150,000 / 0.05

Present Value = $3,000,000

Therefore, the size of the endowment is $3,000,000. This means that if the school invests this amount and earns a 5% interest rate, it will generate $150,000 per year in perpetuity.