2. Your child is about to enter college a year from now. A local foundation provides scholarships (essentially interest-free loans) each year perpetually for students. Your child has won the scholarship just now. When your child joins college, he/she would receive a scholarship of $ 10,000 per year annually for 4 years. Your child is expected to repay the scholarship amount of $ 40,000 in 15 equal yearly installments, interest-free beginning a year after the expiration of his/her scholarship. The foundation seems to be giving an interest free loan. The market interest rate is 8% and would not change in the future. a. What is the PV of the scholarship? b. If the foundation invests a lump sum today to fund all future scholarships. What must be that investment today?
a. What is the PV of the scholarship?
b. If the foundation invests a lump sum today to fund all future scholarships. What must be that investment today?
a)PV of Scholorship
given risk free rate is 8% taken as discount rate to findout PV
scholorship givens at begining of the year .so PV facor @ 8% for year -0 ,year-1, year -2 ,Year-3 are 1, 0.926, 0.857 , 0.793.
| Particulars | Amount |
| year-0 10000 x 1 | 10000 |
| Year-1 10000 x 0.926 | 9260 |
| Year -2 10000 x 0.857 | 8570 |
| Year -3 10000 x 0.793 | 7930 |
| Total | 35760 |
b)Investement today
as per info we take market interest rate is dicount rate, to fund the scholorship per student would be pv of scholorship i,e 35,760 only
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