421.3
3.You will probably want to give something back to the UW at some
point in your life time. You could endow a scholarship
when you retire. Assume that, 40 years from now, in-state tuition
for the UW will be $18000. How much would it cost today to
endow a scholarship that paid $18000 per year forever starting 40
years from now. Assume a discount rate of 8% per year, compounded
annually.
This is a deferred perpetuity question:
0 1... 39 40 41 ... 0 0 18000 18000 … In year 39, when the perpetuity is one year away from starting, it will be worth: 18000/.08=$225,000. However it is not year 39; it is today, so the present value today of that $225000 in 39 years is $225000/(1.08)^39=11185.52. What a bargain!