Question

A college estimates that its new campus center will require $3000 for upkeep at the end of each year for the next 5 years and $5000 at the end of each year thereafter, indefinitely. If money is worth 12% effective, how large an endowment is necessary for the future upkeep of the campus center? Ans; $34457.12

Answer 1

We need to find out Total present value of cashflows.

present value of cashflows will be discounted by the discount rate (value/(1+discount rate)^ nth year

For indefinite cashflow, we use the formula cashflow / (discount rate - growth rate); This will still need to be discounted back to year 0

Year	Cashfow	Cashflow present value formula	Cashflow present value
1	3000	=3000/(1+12%)^1	2678.57
2	3000	=3000/(1+12%)^2	2391.58
3	3000	=3000/(1+12%)^3	2135.34
4	3000	=3000/(1+12%)^4	1906.55
5	3000	=3000/(1+12%)^5	1702.28
6---	5000 p.a	=5000/(12%-0%)/(1+12%)^5	23642.79

Total present value of cashflows is $34457.12