Question

Bolzano Ltd has decided to provide an annual prize in perpetuity for a local university student...

Bolzano Ltd has decided to provide an annual prize in perpetuity for a local university student who demonstrates outstanding leadership. The initial prize, to be awarded in exactly one year's time, will have a value of $500. The value of the prize will be increased in line with inflation, which can be assumed to be 2.75%. The university will invest funds today to provide for this scholarship, and the return on this investment fund is 5.25%. To set up the fund there is an initial administration cost of $100. As well, each year there is an administration cost of 1% of the value of that year's prize. Bolzano Ltd is responsible for these costs. For the scholarship to go ahead, Bolzano Ltd must provide the university with all funds today. How much does Bolzano Ltd need to provide today to the university so that the prize can be initiated?

Homework Answers

Answer #1

The total prize money is growing by the rate of inflation i.e. 2.75%. Hence, we can calculate the total amount by discounting these prize money amounts by a discount rate. We observe that the return on investment fund is 5.25% bu there is also a 1% fees. Hence, it will grow annually by 4.25%. Therefore, this will be our discount rate. So, now we can use the Gordon growth formula to calculate the initial investment required.

Amount = 500 x (1+g)/(r-g) = 500 x 1.0275/(0.0425 -0.0275) = 34250.

Also, we add the initial administration cost of $100. So, the total amount becomes $34350.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Bolzano Ltd has decided to provide an annual prize in perpetuity for a local university student...
Bolzano Ltd has decided to provide an annual prize in perpetuity for a local university student who demonstrates outstanding leadership. The initial prize, to be awarded in exactly one year's time, will have a value of $500. The value of the prize will be increased in line with inflation, which can be assumed to be 2.75%. The university will invest funds today to provide for this scholarship, and the return on this investment fund is 5.25%. To set up the...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how the firms resources incompetencies support the given pressures regarding costs and local responsiveness. Describe entry modes have they usually used, and whether they are appropriate for the given strategy. Any key issues in their global strategy? casestudy: Atlanta, June 17, 2014. Sea of Delta employees and their families swarmed between food trucks, amusement park booths, and entertainment venues that were scattered throughout what would...
      MK Restaurant: Branding of Thai-Style Hotpot The restaurant industry is one of the most...
      MK Restaurant: Branding of Thai-Style Hotpot The restaurant industry is one of the most competitive in Thailand. With a large number of players ranging from restaurants in five-star hotels, global fast-food chains to small stalls along the streets and everything in between, the Thais are spoiled for choice. In addition, as the world becomes globalized, consumers are familiar with international dishes and would not hesitate to try new offerings from the other side of the globe. As a...
Please read the article and answear about questions. Determining the Value of the Business After you...
Please read the article and answear about questions. Determining the Value of the Business After you have completed a thorough and exacting investigation, you need to analyze all the infor- mation you have gathered. This is the time to consult with your business, financial, and legal advis- ers to arrive at an estimate of the value of the business. Outside advisers are impartial and are more likely to see the bad things about the business than are you. You should...
Using the model proposed by Lafley and Charan, analyze how Apigee was able to drive innovation....
Using the model proposed by Lafley and Charan, analyze how Apigee was able to drive innovation. case:    W17400 APIGEE: PEOPLE MANAGEMENT PRACTICES AND THE CHALLENGE OF GROWTH Ranjeet Nambudiri, S. Ramnarayan, and Catherine Xavier wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be...
Mattel Responds to Ethical Challenges Business Ethics This case was written by Debbie Thorne, John Fraedrich,...
Mattel Responds to Ethical Challenges Business Ethics This case was written by Debbie Thorne, John Fraedrich, O. C. Ferrell, and Jennifer Jackson, with the editorial assistance of Jennifer Sawayda. This case was developed for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal discussion by management. All sources used for this case were obtained through publicly available material. Mattel, Inc. is a world leader in the design, manufacture, and marketing of family...