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You will endow a scholarship that will pay a full year of tuition to the winner...

You will endow a scholarship that will pay a full year of tuition to the winner every year forever. The first winner will receive $36,891 in one year. Tuition will increase by 3% per year. If the endowment can be invested in a fund that returns 8% per year, how much will your endowment today be?

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Answer #1

Funds needed for the endowment = Tuition next year / (1 + investment rate of return) + Tuition next year (1+ growth rate) / (1 + investment rate of return)2 +......+ Tuition next year (1+ growth rate)n-1 / (1 + investment rate of return)n  

Approximating the cash flows

Funds needed for the endowment = Tuition next year / (investment rate of return - growth rate)

Funds needed for the endowment = $36,891 / (8% - 3%)

Funds needed for the endowment = $737,820

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