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Time_Value_Answers_7_10

# Time_Value_Answers_7_10 - Example(Question#7 Suppose that...

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Example: (Question #7) Suppose that after you graduate you decide that finance was the best thing that has ever happened in your lives and in a fit of collective glee your class decides to endow a chair in the Finance Department. You want your endowment to provide \$50,000 annually to whatever professor holds the chair. You want the chair to continue indefinitely. If interest rates are 10%, how much money does your class need to raise today for this worthy project if you want the payments to begin one year from today? What is t C ? (\$50,000) What is r ? So, 000 , 500 \$ 10 . 0 000 , 50 \$ 0 = = P So, if you want to provide payments of \$50,000 in perpetuity when the interest rate is 10%, you need to put \$500,000 in the account today. Does this make sense? How much interest is earned each year? What would happen if you ever ate into the principal? Example: (Question #8) Suppose that instead of wanting to endow the chair in perpetuity you think finance is only arbitrarily close to the greatest thing that ever happened to you and only want to endow

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Time_Value_Answers_7_10 - Example(Question#7 Suppose that...

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