A charitable foundation received a donation from a wealthy building contractor i

Question

A charitable foundation received a donation from a wealthy building contractor in the amount of $4 million. It specifies that $200,000 is to be awarded each year for 5 years starting now (i.e., 6 awards) to a university engaged in research pertaining to the development of layered composite materials. Thereafter, grants equal to the amount of interest earned each year are to be made. If the size of the grants from year 6 into the indefinite future is expected to be $1,000,000 per year, what annual rate of return is the foundation earning?

Explanation / Answer

PWd= PWr 4=0.2 + 0.2(P/A,i,5) + 1(P/A,i,infinity) 3.8 = 0.2(P/A,i,5) + 1(P/A,i,infinity) 3.8=0.2(1/i) +1(1/i) 3.8 = 1.2(1/i)+(1/i) i= 31.57%

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