If a donation of $100,000 is expected to pay out scholarships of $10,000 every year and the funds earn 7.5% compounded annually, how long will it be before the first annual payment can be made?

Question

Quizplus · Accepted Answer

The first payment can be made when the interest earned equals or exceeds the scholarship amount. At 7.5% interest compounded annually, the formula to calculate the future value is FV = PV(1 + r)^n, where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of years. Rearranging to solve for n when FV = $110,000 (since the scholarship is $10,000, the total needs to be $110,000 to maintain the principal and pay the scholarship), PV = $100,000, and r = 0.075, we find that n is approximately 5 years.

If a Donation of $100,000 Is Expected to Pay Out