1. You want to endow a scholarship that will pay $6,000 per year forever, starting one year from now. If the school's endowment discount rate is 7%,
What amount must you donate to endow the scholarship?
How would your answer change if you endow it now, but it makes the first award to a student 10 years from today?
2. You are trying to decide how much to save for retirement. Assume you plan to save $5,000 per year with the first investment made one year from now. You think you can earn 6.5 % per year on your investments and you plan to retire in 33 years, immediately after making your last $5,000 investment.
a. How much will you have in your retirement account on the day you retire?
b. If, instead of investing $5,000 per year, you wanted to make one lump-sum investment today for your retirement that will result in the same retirement saving, how much would that lump sum need to be?
c. If you hope to live for 25 years in retirement, how much can you withdraw every year in retirement (starting one year after retirement) so that you will just exhaust your savings with the 25th withdrawal (assume your savings will continue to earn 6.5 % in retirement)?
d. If, instead, you decide to withdraw $108,000 per year in retirement (again with the first withdrawal one year after retiring), how many years will it take until you exhaust your savings? (Use trial-and-error, a financial calculator: solve for "N", or Excel: function NPER)
e. Assuming the most you can afford to save is $1,000 per year, but you want to retire with $1,000,000 in your investment account, how high of a return do you need to earn on your investments? (Use trial-and-error, a financial calculator: solve for the interest rate, or Excel: function RATE)