Question

You are head of the Schwartz Family Endowment for the Arts. You have decided to fund an arts school in the San Francisco Bay area in perpetuity. Every five years, you will give the school $1 million. The first payment will occur five years from today. If the interest rate is 8% per year, what is the present value of your gift?

Answer 1

Answer:

$2,130,833.16

Explanation:

For computing the present value, first we have to determine the five years rate which is shown below:

= (1 + rate) ^ number of years - 1

= (1 + 0.08) ^ 5 years - 1

= (1.08)  ^ 5 years - 1

= 1.4693280768  - 1

= 46.93%

Now the present value would be

= Amount invested ÷ five years rate

= $1,000,000 ÷ 46.93%

= $2,130,833.16