Question

A generous benefactor to a local ballet plans to make a one-time endowment that would provide the ballet with $150,000 per year into perpetuity. The rate of interest is expected to be 5 percent for all future time periods. How large must the endowment be?

Answer 1

Answer:

Endowment Must be $3,000,000 Large

Explanation:

The endowment can be calculated using the following formula:

Value=$\frac{Cash\ Flow}{Rate\ of\ Interest}$

In our case:

Given data:

Cash Flow =$150,000 per year

Rate if interest= 5%=0.05

Required:

How large must the endowment be?

Solution:

Endowment=$\frac{Cash\ Flow}{Rate\ of\ Interest}$

$Endowment=\frac{150,000}{0.05}\\ Endowment=\ 3,000,000$

Endowment Must be $3,000,000 Large