?? On completion of her introductory finance? course, Marla Lee was so pleased w

Question

??On completion of her introductory finance? course, Marla Lee was so pleased with the amount of useful and interesting knowledge she gained that she convinced her? parents, who were wealthy alums of the university she was? attending, to create an endowment. The endowment is to allow three needy students to take the introductory finance course each year in perpetuity. The guaranteed annual cost of tuition and books for the course is 1,300 per student. The endowment will be created by making a single payment to the university. The university expects to earn exactly 5% per yr on these funds.

a.??How large an initial single payment must? Marla's parents make to the university to fund the? endowment?

b. What amount would be needed to fund the endowment if the university could earn 8% rather than 5% per yr on these funds?

?

Explanation / Answer

a. total payments per year = 1300 * 3 = 3900

initial singlw payment = 3900/0.05 = 78,000

b. if the rate is 8% amount required = 3900/0.08 = 48,750

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