Capitilzed equivalent question An engineering school has just completed a new en

Question

Capitilzed equivalent question

An engineering school has just completed a new engineering complex worth $47 million. A campaign targeting alumni is planned to raise funds for future maintenance costs, which are estimated at $1.8 million per year. Any unforeseen costs above $1.8 million per year would he obtained by raising tuition. Assuming that the school can create a trust fund that earns 7% interest annually, how much has to be raised now to cover the perpetual string of $1.8 million annual costs? The comments will also carry marks.

Explanation / Answer

school should create trust fund of = 1.8/.07 = $25.71 million

as present value of all the future cash flow = (1.8/1.07)+(1.8/1.07^2)..........infinity

on solving,

= 1.8/.07 = $25.71 million

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