(1). The annual maintenance on a machine is $300. The machine has an expected li

Question

(1). The annual maintenance on a machine is $300. The machine has an expected life of 15 years. How much must be invested as a lump sum today at 4% interest to cover all 15 years of maintenance?

(2). After the IPO of your start-up you decide to create the Prize. You are going to create the prize with a cash gift of $100,000,000. (a) Assuming you can earn 6% return on investments for the next 10 years how many $1,000,000 prizes can you award each year? (b)What if you want this to last 20 years? (c) Forever?

Explanation / Answer

1.The present value of the sum tody is given by =pv(rate,nper,pmt) =pv(0.04,15,300) = $3,335.52

So $3,335.52 should be invested today.

2. a.This is given by =pmt(rate,nper,pv) =pmt(0.06,10,100000000) = 13,586,795.82. So you can give 13 awards of 1,000,000 each year.

If its 20 years, we will put =pmt(0.06,20,100000000) = 8,718,455.70. So you can give 8 awards of 1,000,000 each year.

It its forever, then it is 100,000,000*0.06= 6,000,000 = 6 awards of 1,000,000 each year.

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