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14 May, 12:06

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?

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  1. 14 May, 15:57
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    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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