11/18/23, 6:05 PM Answer
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Question:
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Step: 1
Provided,
Endowment = $100,000 Annual Scholarship = $10,000 Therefore,
If Aloma donates the endowment today, $10,000 out of it will be rewarded as the scholarship, i.e.
$Deposit = Donation - Scholarship
100000−
10000 =90, 000
Explanation
Aloma would in actual be earning interest on
90, 000 ∵
10,000 ispaid from the donation on the same day.
Step: 2
11/18/23, 6:05 PM Answer
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Perpetuity refers to the magnitude of invariant cash flows recurring during the lifetime (forever).
Formula:
PV
Perpetuity= D r
We know that,
PV (Perpetuity) = $90,000
D (Annual Scholarship) = $10,000 Hence,
$r = D/PV (Perpetuity)
10000
90000 = 0.1111$
Explanation
The required IRR is 11.11%
Final Answer
The required rate of return is 11.11% to ensure an annual reward of $10000
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