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Dr. Fog E. Professor is retiring and wants to endow a chair of engineering economics at his university. It is expected that he will need to cover an annual cost of $250,000 forever. What lump sum must he donate to the university today if the endowment will earn 5% interest?

Respuesta :

facundobuzzetti

Answer:

The lump sum should be of $5,000,000.

Explanation:

Giving the following information:

It is expected that he will need to cover an annual cost of $250,000 forever. The interest rate is 5% annual.

We need to calculate the present value of a perpetual annuity. We will use the following formula:

PV= Cf/i

PV= 250,000/0.05

PV= $5,000,000

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