A charitable foundation has $500,000 invested in an account that earns 7%.The foundation has promised to begin making annual payments to beneficiaries in one year,and the first payment will be $25,000.The foundation has promised that future payments will grow at a constant rate forever.At what rate can the foundation afford to increase payments assuming that it makes no additional deposits into the account?
A)0%; it can't afford to increase payments forever without adding more money to the account.
B)1%
C)2%
D)3%

Question

Quizplus · Accepted Answer

The foundation can afford to increase payments at a rate equal to the difference between the account's interest rate and the initial payment's growth rate. With a 7% return and a $25,000 initial payment, the growth rate that allows for perpetual payments is 2% (7% - 5% = 2%).

A Charitable Foundation Has $500,000 Invested in an Account That