Question

Time wants to create a scholarship fund by saving for several years before the fund starts making annual scholarship payments forever. She plans to save $24000 per year for five years. Her first savings contribution is expected in one year. How much can the fund be expected to provide each year for scholarships if the fund is expected to ear 19.40 percent per year make equal scholarship payments forever and make its first scholarship payment in six years?

Answer 1

Step 1 :	Value of contribution at the end of year 5
	Future Value of an Ordinary Annuity
	= C*[(1+i)^n-1]/i
	Where,
	C= Cash Flow per period
	i = interest rate per period
	n=number of period
	= $24000[ (1+0.194)^5 -1] /0.194
	= $24000[ (1.194)^5 -1] /0.194
	= $24000[ (2.4267 -1] /0.194]
	= $1,76,502.80
Step 2 :	Calculation of annual expected pay amount for forever
	=$176502.80*19.40%
	=$34241.54