You have decided to endow a Chair in Finance at Whatsamatta University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year forever (first payment one year from today)and is invested at a rate that pays out 4.50% per year?
A)$277,777.78
B)$2,902,777.78
C)$2,777,777.78
D)There is not enough information to answer this question.

Question

Quizplus · Accepted Answer

The formula for the present value of perpetuity, which is the value we need to deposit into the endowment account today, is:

PV = PMT / r

Where PV is the present value, PMT is the annual payment ($125,000), and r is the interest rate (4.50%).

Plugging in the values, we get:

PV = $125,000 / 0.045
PV = $2,777,777.78

So we need to deposit $2,777,777.78 into the endowment account today to endow a perpetuity that pays $125,000 per year forever. Therefore, the best choice is C.

You Have Decided to Endow a Chair in Finance at Whatsamatta