Question

John and Tai are graduating from a university in London. They decided to contribute the same amount of money to the university's endowment for the purpose of supporting the growth of the institution. John will be contributing $500 at the end of each year for 9 years straight. Meanwhile, Tai prefers to give a lump sum amount of donation today. How much should Tai give to equal the value of John's donation, assuming that the endowment fund earns 7.5% interest, compounded annually? What is the value of John,s contribution after 9 years with the same rate?

Answer 1

Interest on endowment fund is 7.5%

John will be contributing 500 end of each month for 9 years

It is annuity in which periodic payment is made at the end of the year

Tai will give one time donation which is equal to present value of John contribution

P.v of John contribution is

500(PVIFA 7.5% 9 y)

= 500(6.3789) = 3189.45

So tai will be contributing 3189.45 today

Value at the end of 9 years is

P.v(1+r)^n

Where r is rate of interest

N is no of years

3189.45(1.075)^9 = 6115