Question

Your 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 A.

Explanation:

Giving the following information:

As you’ve committed to fund a $5000 scholarship ever year beginning one year from tomorrow

You want to fund the scholarship forever, the account will earn 4.50% per annum every year.

We are in the presence of a perpetual annuity. We need to use the following formula:

PV= Cf/i

Cf= cash flow

PV= 5,000/0.045= $111,111.11