Your school is interested in starting a scholarship fund. Each scholarship will
ID: 1221690 • Letter: Y
Question
Your school is interested in starting a scholarship fund. Each scholarship will be $500 and they anticipate funding 10 students each year. All scholarships are awarded at end of year. The organization plans to provide a total of 50 scholarships, with the 1st scholarships awared at the end of the 4th year. How much would the organization need to deposit today(1 lump sum deposit) to fully fund scholarships for these 50 students? Assume that the school can receive a return of 6%(compounded annually) on their investment.
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Explanation / Answer
Amount of each scholarship = $500
No. of students per year to be funded = 10
No. of total scholarships = 50
1st scholarship at the end of 4th year. Same way 2nd would be at the end of 5th year 3rd at the end of 6th year and so on...5th at the end of 8th year.
Amount to be paid in total = 50 students * 500 = $25000
We have total of 8 years, we want to invest today, so that the Total Amount in the Future be equal to $25000 given the rate of interest = 6% compounded annually.
Let it be P to be invested today.
Thus we have P (1+0.06)^8 = 25000
Thus P = $15685.30
Thus an initial investment of $15685 today will ensure that the school is able to fund the scholarships at the end of 4th, 5th...8th year.
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