Question

1. Your child is about to enter college a year from now. A local foundation provides scholarships (essentially interest-free loans) each year perpetually for students. Your child has won the scholarship just now. When your child joins college, he/she would receive a scholarship of $ 10,000 per year annually for 4 years. Your child is expected to repay the scholarship amount of $ 40,000 in 15 equal yearly installments, interest-free beginning a year after the expiration of his/her scholarship. The foundation seems to be giving an interest free loan. The market interest rate is 8% and would not change in the future.
   1. What is the PV of the scholarship?
   2. If the foundation invests a lump sum today to fund all future scholarships. What must be that investment today?

Answer 1