Question

Creating an endowment Personal Finance Problem On completion of her introductory finance​ course, Marla Lee was so pleased with the amount of useful and interesting knowledge she gained that she convinced her​ parents, who were wealthy alumni of the university she was​ attending, to create an endowment. The endowment will provide for three students from​ low-income families to take the introductory finance course each year in perpetuity. The cost of taking the finance course this year is ​$300 per student​ (or ​$900 for 3​ students), but that cost will grow by 2.2​% per year forever.​ Marla's parents will create the endowment by making a single payment to the university today. The university expects to earn 6​% per year on these funds. a. What will it cost 3 students to take the finance class next​ year? b. How much will​ Marla's parents have to give the university today to fund the endowment if it starts paying out cash flow next​ year? c. What amount would be needed to fund the endowment if the university could earn 8​% rather than 6​% per year on the​ funds?

Answer 1

Answer:

Course cost netxt year: 919.8

Perpetuity fund  at 6% return: 24,205.27

Perpetuity funds at 8% return: 15,858.63

Explanation:

1 student 300

3 student 900

it grows at 2.2% per year

the return on the fund will be of 6%

The cost of the couse for next year will be:

900 x (1+2.2%) = 900 x 1.022 = 919.8

The perpetuity will be calculate as follow:

$\frac{cost}{return-growth} = Perpetuity$

$\frac{919.8}{0.06-0.022} = Perpetuity$

Perpetuity fund: 24205.26316

Ifthe return is for 8% per year:

$\frac{919.8}{0.08-0.022} = Perpetuity$

Perpetuity funds: 15858.62069