Your school is interested in starting a scholarship fund. Each scholarship will
ID: 1221748 • 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 first scholarships awarded 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
Annual scholarship expense = $500 x 10 = $5,000
Number of scholarship years = 50 / 10 = 5
Required deposits at end of 4th year = $5,000 x PVIFA(6%, 5) = $5,000 x 4.2124 = $21,062
Required deposut at current year = $21,062 x PVIF(6%, 4) = $21,062 x 0.7921 = $16,683.08
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