A wealthy beekeeper has decided to endow his favorite science museum by establis
ID: 2801650 • Letter: A
Question
A wealthy beekeeper has decided to endow his favorite science museum by establishing funds for an endowment which would provide $500,000 per year in perpetuity for research. The beekeeper will fund the endowment upon his fortieth birthday 10 years from today. He plans to accumulate the endowment by making annual end-of-year deposits into an account. The nominal rate of interest is expected to be 10 percent in all future periods, while the inflation rate will be 2%. How much must the individual deposit each year to accumulate to the required amount?
a. $1,927,720
b. $437,220
c. $233,830
d. $313,730
Explanation / Answer
D is the correct answer.
Value of a perpetuity = Annual Cash Flow / Interest Rate = 500,000 / 10% = $5,000,000
In order to accumulate $5m in 10 years, annual deposit can be calculated using PMT function
N = 10, I/Y = 10%, PV = 0, FV = 5,000,000 => Compute PMT = $313,730