(20 points) A philanthropic organization wants to set up a trust for the upkeep
ID: 2428738 • Letter: #
Question
(20 points) A philanthropic organization wants to set up a trust for the upkeep of a memorial for the organization's founder. To do this, they would like to set up an endowed professorship at Prospector University (PU). They would like the professorship to provide support a faculty member's activities, and it costs $35,000 to start up an endowed position at PU. If the organization has available $350,000 to capitalize the endowment and they are contemplating an infinite life for the endowment, how much money will be available each year if the maximum interest that PU is able to obtain in its investments is 10% annually? 6.Explanation / Answer
Given capitalized cost is 350,000
Start up cost is 35,000
Rate of interest is 10%
How much money will be available each year for PU?
CAPITALIZED COST= FIRST COST+PRESENT WORTH OF ANNUAL CASH OUTFLOWS CONTINUE UPTO INFINITE PERIOD
CAPITALIZED COST=Initial cost+Annual outflows÷rate of interest
350,000=35,000+Annual cost÷ .10 (10%)
315,000=annual cost÷.10
Annual cost= 315,000×.10
Annual cost=31,500
31,500 will be available each year upto infinite period.
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