Question

A person wants to establish an endowment to cover a company's maid service costs in perpetuity. If the maid service costs are expected to be $4.2M each year and then every 3 years and additional $2M is required. How much would be required to endow the maid service costs in perpetuity if the gift could be invested and earn 15%

Answer 1

Annual interests rate = 15%

Maid service cost annual = 4200000

Amount funded will be present value of perpetuity = annual Maid service cost / Annual interest rate

=4200000/15%

=28000000

Additional cost per 3 years = 2000000

We will calculate effective 3 year rate to fund this annuity.

Effective 3 year rate = ((1+annual rate)^3)-1

=((1+15%)^3)-1

=0.520875 or 52.0875%

Amounted funded for additional cost = cost in 3 year / effective 3 year rate

= 2000000/52.0875%

=3839692.825

Total amount funded for both the cost = sum of both present values

=28000000+3839692.825

=31839692.83

So amount required to endow the maid service costs in perpetuity is $31839692.83 or 31.84 millions