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T2-12 Multiple Choice A. $437,500 B. $750,000 C. $1,200,000 D. $1,400,000 E. $1,

ID: 2742323 • Letter: T

Question

T2-12 Multiple Choice

A. $437,500
B. $750,000
C. $1,200,000
D. $1,400,000
E. $1,450,750

A wealthy benefactor just donated some money to the local college. This gift was established to provide scholarships for worthy students. The first scholarships will be granted one year from now for a total of $35,000. Annually thereafter, the scholarship amount will be increased by 5.5 percent to help offset the effects of inflation. The scholarship fund will last indefinitely. What is the value of this gift today at a discount rate of 8 percent?

Explanation / Answer

Value of gift = scholarships at year1÷(Discount rate-Growth rate)

= $35,000/(8%-5.5%)

= $1,400,000

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