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1. If Lisa Hamilton Want To fund a scholarship that would pay $12,500 per year forever...

1. If Lisa Hamilton Want To fund a scholarship that would pay $12,500 per year forever at GSU, how much would Lisa Have to deposit today if she wanted the scholarship to start paying six (6)years from today? Assume the endowment could earn 6.25% p.a. interest forever.

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Answer #1

Given: Annuity = 12500 starting 6 years from now. Interest = 6.25%

You need to calculate the value of perpetuity

Formula = c / r

C= Annuity = 12500, R = Interest rate

Since the Annuity start 6 years from now so calculate the value of perpetuity at Time 5 first

Value of perpetuity at time 5 = 12500 / 0.0625

= 200000

Now calculate the amount need to deposit today so calculate the Present value of 200000 .

PV = FV / (1+r)n

= 200000 / (1.0625)5

= 200000 / 1.35408115

= 147701.6347

Amount need to deposit today.

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