Question

How much money is needed today to establish a scholarship fund paying §1750 every year if the fund interest at j1= 5.6 % and the firsf year payment will be made four years from now?

Answer 1

A = 1750 per year

I = 5.6% per annum

since the fund involves perpetual cash flow i.e.payment of $1750 per annum forever from 4^th the year starting

So PV (present value) of perpetual cash flow at t₃(3years from now)= A/i

= 1750/.056 = $ 31250

(we are calculating PV at t₃ because Present value stands 1 year back , hence the cash flow of $1750 starting from year 4, will come back to 3rd year when taken PV

So money needed today to establish a fund at t₀(now)= 31250/(1.056)3

=$ 26537.39