Jasmine wants to fund a scholarship in honour of her parents that will pay $15 000 per year to a deserving student, starting next year. She wants the annual amount paid to the student to grow by 2% per year to keep up with student fee increases. Given that the interest rate she can earn on her investment is 6%, how much does she need to fund this perpetuity?

Question

Quizplus · Accepted Answer

To fund a growing perpetuity, the formula is P = C / (r - g), where P is the present value, C is the initial payment, r is the interest rate, and g is the growth rate. Here, C = $15,000, r = 0.06, and g = 0.02. So, P = 15000 / (0.06 - 0.02) = 15000 / 0.04 = $375,000.

Jasmine Wants to Fund a Scholarship in Honour of Her