A recent alumnus of your university gifted money to the school to fund annual scholarships for needy students. The school expects to earn an average rate of return of 6.5 percent and distribute $40,000 annually in scholarships. What was the amount of the gift?

Question

Quizplus · Accepted Answer

We can use the formula for present value of an annuity to find the initial gift amount. PV = (PMT / r) x (1 - (1 + r)^-n), where PMT is the annual scholarship amount, r is the annual rate of return, and n is the number of years the scholarship will be funded. Plugging in the given values, we get PV = (40,000 / 0.065) x (1 - (1.065)^-infinity). Solving for PV gives us $615,384.62. Therefore, the initial gift amount must have been $615,384.62.

A Recent Alumnus of Your University Gifted Money to the School