Question

A firm wants to sponsor an engineering lab. This requires $2.5M to construct the lab, $1.2M to equip it, and $600,000 every 5 years for new equipment. What is the required endowment if the university will earn 6% interest on funds

Answer 1

Answer:

$5.47M

Explanation:

The required endowment from the sponsor is the total costs required immediately plus the present value of the new equipment that needs to be purchased every five years as shown thus:

Immediate costs=cost of lab construction+cost of equipping the lab

Immediate costs=$2.5M+$1.2M

Immediate costs=$3.7M

Present value of every 5 years equipment cost=cost/(1+interest)^n-1

interest rate=6%

n=5 years(the frequency of incurring the cost)

PV=$0.60M/(1+6%)^5-1

PV=$0.60M/0.33822558

PV=$1.77M

required endowment =$3.70M+$1.77M

required endowment =$5.47M