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

Question

Quizplus · Accepted Answer

To determine the present value of perpetuity, we use the following formula:

Present Value = Annual Payment ÷ Interest Rate

Substituting the given values, we get:

Present Value = $250,000 ÷ 0.08
Present Value = $3,125,000

Therefore, the endowment must be $3,125,000 to provide $250,000 per year into perpetuity at an interest rate of 8%. The correct answer is B.

A Generous Philanthropist Plans to Make a Onetime Endowment to a Renowned