Question

if it can earn 10% return on its investments and wants to withdraw 10,000 a year, how large does the endowment need to be

Answer 1

$100,000

Step-by-step explanation:

To determine how large the endowment needs to be in order to withdraw $10,000 per year and earn a 10% return on investments, 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 $10,000 per year and the interest rate is 10%.

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 = $10,000 / 0.10

Present Value = $100,000

Therefore, the endowment needs to be $100,000 in order to withdraw $10,000 per year and earn a 10% return on investments. With this endowment, the school can generate $10,000 per year in perpetuity by investing it at a 10% return.