Question

Your grandmom wishes to create an account that would start donating $11,200 per year to a hospital for an indefinite period of time beginning today. If the interest rate is 3.90% , how much does she need to put in that account?

a.

$310,016

b.

$275,979

c.

$276,400

d.

$298,379

e.

$287,179

Answer 1

- Grandmom wishes to donate $ 11,200 per year in perpetuity from today through an account.

We will calculate the Present Value of Perpetuity payments, while calculating the Present Value of Perpetuity payments we take cashflow at year end but since Grandmom wishes to donate from today we will add the Cashflow the will take place today to the Present value.

Calculating the Present Value of Perpetuity payments:-

Present Value = (Annual Cashflow/Interest rate) + Annual Cashflow

Present Value = ($11,200/3.90%) + $11,200

Present Value = $287,179.49 + $11,200

Present Value = $298,379.49

So, the amount she need to put in that account is $298,379

Option D

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