Question

Suppose you wish to raise some money for your favorite local charity. This charity needs $50,000 a year to run its operation and you want to make sure that it is ensured an annual payment of this amount from now on for every year in the foreseeable future. Given an interest rate of 5%, how much would you have to fund this perpetuity to guarantee the charity a payment of $50,000 per year?

Answer 1

Answer:

I need to raise $1,000,000 in order to guarantee that the charity gets an annual payment of $50,000.

Explanation:

We have to find the present value of an annuity with no growth rate. The equation as follows.

$Present Value=\frac{Annuity}{Interest Rate}$

Therefore:

$Present Value=\frac{50,000}{0.05}=1,000,000$

Best of luck.