An endowment fund of $20,000 is to pay out $R every year forever,with the first payment made exactly 2 years from now.If j₁ = 7%,what is R?

Question

Quizplus · Accepted Answer

We can use the perpetuity formula to solve the problem:

PV = R / j
where PV is the present value of the endowment fund, j is the annual interest rate, and R is the annual payout.

Plugging in the numbers we have:
$20,000 = R / 0.07

Solving for R:
R = $20,000 x 0.07
R = $1400

Therefore, the annual payout should be $1400 starting 2 years from now.

An Endowment Fund of $20,000 Is to Pay Out $R