The value IN YEAR 2 of this growing perpetuity is
W99NOONQ1.2
Now say that you want the first scholarship of $10,000 to be paid 3 years from today and that you want the amount of the scholarship to keep up with inflation after that. If inflation is expected to be 3% and you can still earn a nominal return of 9% on your money, what will it cost to endow the scholarship today? (3 pts)
Draw a cash flow diagram:
0
1
2
3
4 …
10,000
10,300 …
The value IN YEAR 2 of this growing perpetuity is
Did moving the start of the scholarship to year 3 positively or negatively impact the cost? WHY?
It decreased the cost by allowing us to wait before funding the scholarship. That is, we could invest less than $121,111.11 today in order to start funding a perpetual scholarship starting in year 3 because our investment would grow for 3 years before any money is withdrawn.
Did making the scholarship keep up with inflation positively or negatively impact the cost? WHY?
This part increased the cost. Anytime you go from a level series of cash flows to a constantly increasing series, it becomes more expensive to create.