You have decided to endow a Chair in Finance at Whatsamatta University

You have decided to endow a Chair in Finance at Whatsamatta University.

How much money must you deposit into the endowment account today if the Chair pays $125,000 per year forever (first payment one year from today) and is invested at a rate that pays out 4.50% per year?
A) $277,777.78
B) $2,902,777.78
C) $2,777,777.78
D) There is not enough information to answer this question.

ANSWER

C
Explanation: C) PV = PMT/r = $125,000/0.045 = $2,777,777.78.