Question

our Grandfather wants to establish a scholarship in his father’s name at a local university and had stipulated that you will administer it. As you’ve committed to fund a $5000 scholarship ever year beginning one year from tomorrow, you’ll want to set aside the money for the scholarship immediately. At tomorrow’s meeting with you grandfather and the bank’s representative, you will need to deposit __________ so that you can fund the scholarship forever, assuming that the account will earn 4.50% per annum every year.a. $111,111b. $88,889c. $100,000d. $133,333

Answer 1

Answer:

The correct answer is Option A. you will need to deposit $111,111 so that you can fund the scholarship forever, assuming that the account will earn 4.50% per annum every year.

Explanation:

Perpetuity is the cash flows to be receivable for an unspecified period of time. The present value of a perpetuity is calculated as the cash flows divided by the interest rate provided.  

Given data;

Amount needed to be deposited = $5000

Interest rate = 4.50%

Present Value of Perpetuity = Cash Flows ÷ Interest rate  

= $5000 ÷ 0.045

= $111,111