Question

A prominent alumnus of your university has just donated $2,800,000 to fund a scholarship that will distribute $104,000 per year forever beginning in one year. For this to be true, what rate of return is expected on the donation? Multiple Choice Ο 3.90% Ο 3.84% Ο 3.58% Ο 371% Ο 3.96%

Answer 1

Present Value of Perpetuity
PV=A/r-g
PV= Present Value
A= Annuity
r= interest rate
g= growth rate
$2800000=$104000/r-0
r =$104000/2800000
r =0.0371
Rate =3.71%
Correct Option: FOURTH