A generous philanthropist plans to make a one-time endowment to a renowned heart research center which would provide the facility with $250,000 per year into perpetuity. The rate of interest is expected to be 8 percent for all future time periods. How large must the endowment be?
A) $2,314,814
B) $2,000,000
C) $3,125,000
D) $3,000,000

Question

Quizplus · Accepted Answer

To calculate the present value of perpetuity, we can use the formula: Present Value = Annual Payment / Interest Rate
In this case, the annual payment is $250,000 and the interest rate is 8%, so:
Present Value = $250,000 / 0.08 = $3,125,000
Therefore, the endowment must be $3,125,000 to provide $250,000 per year into perpetuity.

A Generous Philanthropist Plans to Make a One-Time Endowment to a Renowned