Decide to make equal contributions at beginning of year

Assignment Help Financial Management
Reference no: EM131324555

Ross Clark wishes to endow a chair in finance at his alma mater. The university indicated that it requires $200,000 per year to support the chair, and the endowment would earn 10% per year. To determine the amount Ross must give the university to fund the chair, we must determine the present value of a $200,000 perpetuity discounted at 10%. Using Equation 5.7, we can determine that the present value of a perpetuity paying $200,000 per year is $2 million when the interest rate is 10%:

PV = $200,000 ÷ 0.10 = $2,000,000

In other words, to generate $200,000 every year for an indefinite period requires $2,000,000 today if Ross Clark’s alma mater can earn 10% on its investments. If the university earns 10% interest annually on the $2,000,000, it can withdraw $200,000 per year indefinitely.

Rather than making contributions to an IRA at the end of each year, you decide to make equal contributions at the beginning of each year. Based on the information provided at MFL, solve for the future value of beginning-of-year annual IRA contributions grown until retirement.

Reference no: EM131324555

Questions Cloud

Ductus arteriosus and the ductus venosus : 1) The ductus arteriosus and the ductus venosus are two key vessels in the fetal circulation that are absent in the adult circulation. What are their function in the fetus? Why are they necessary?
Find and correct logic errors so that program works properly : CIS242: During each summer, John and Jessica grow vegetables in their backyard and buy seeds and fertilizer from a local nursery. Find and correct the logic errors so that the program works properly.
Special features of the lung : 1) Starting with the umbilical vein, list/chart the general flow of blood through the fetus of a pig. 2) What special features of the lung make it a useful organ for gas exchange?
What is the incidence of the subsidy on buyers : In early 2010, the U.S. government offered an $8,000 subsidy to new homebuyers. What effect does a perhouse subsidy have on the equilibrium price and quantity of the housing market? What is the incidence of the subsidy on buyers? Hint: A subsidy i..
Decide to make equal contributions at beginning of year : Ross Clark wishes to endow a chair in finance at his alma mater. The university indicated that it requires $200,000 per year to support the chair, and the endowment would earn 10% per year. Rather than making contributions to an IRA at the end of eac..
Prepare a presentation on human reproduction : You will develop a PowerPoint Presentation about human reproduction. You are to pretend that the presentation is what you will use to give your son or daughter "the talk" about human reproduction. Make sure you use correct terminology. If you have..
Explain what would happen to the cell : Select at least 2 cell structures. What hypothesis could you form to explain what would happen to the cell or the organism if each cell structure were damaged or destroyed?
What impact will the convergence process have : What will be some of the main concerns for your company as it moves from U.S. GAAP to IFRS - Generate a list of differences that you would expect to see on your income statement and your balance sheet after the convergence process is complete.
Draw a supply-anddemand diagram : From these results, can we make any inferences about the elasticity of supply or demand? Which curve (or curves) changed, and why? Draw a supply-anddemand diagram and label the axes to illustrate what happened.

Reviews

Write a Review

Financial Management Questions & Answers

  Calculate your portfolio new beta

Your retirement fund consists of a $ 5,000 investment in each of 15 different common stocks. The portfolio's beta is 1.20. Suppose you sell one of the stocks with a beta of 0.8 for $ 5,000 and use the proceeds to buy another stock whose beta is 1.6. ..

  Calculate the market-to-book ratio and pe ratio.

Market Value Ratios You are considering an investment in Roxie’s Bed & Breakfast Corp. During the last year, the firm’s income statement listed an addition to retained earnings of $4.8 million and common stock dividends of $2.2 million. Calculate the..

  Design compensation and reward plans

How can you design compensation and reward plans that meet the following goals for each function in the company (e.g., operations, sales, web design, as appropriate): You want to attract and retain high quality, experienced employees to the winery.

  What is the discounted payback period for the project

Nugent Communication Corp. is investing $10,930,700 in new technologies. The company’s management expects significant benefits in the first three years after installation (as can be seen by the following cash flows), and smaller constant benefits in ..

  Lower than the standardized rate on futures contract

"A Treasury bond futures contract settled at 97'16." Calculate the present value of one futures contract? Are current market interest rates higher or lower than the standardized rate on a futures contract? Explain.

  How much is your investment outlay

you buy an asset for Rs.1,000,000. If it costs Rs.100,000 for shipping and installation,- how much is your investment outlay?

  Explain the meaning of this calculated beta

Calculate the beta of stock using CAPM, if the appropriate require rate of return for w stock is 15%, the risk- free rate is 5%, and the expected rate of return for the market is 10%. Also explain the meaning of this calculated beta.

  Find the value closest to effective rate of interest

John Wins $1,000,000 in a lottery and will be paid 20 equal annual installments of $50,000 with the first payment due today. A bank offers to exchange Johns winnings for perpetuity of $X per month with the first payment due today. Find the value clos..

  Age affect berkshire hathaways recent strategic moves

How does Mr. Buffett’s age affect Berkshire Hathaway’s recent strategic moves such as buying Burlington Northern Santa Fe Railroad in 2010 instead of another large insurance company?

  What is the market value of the company debt

Bennington Industrial Machines issued 142,000 zero coupon bonds seven years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.2 percent. Interest rates have recently increased, and the bonds now have a yield to maturity..

  For the sake of illustration

For the sake of illustration, consider a situation where RestLife holds a $120 MM face value position with an IR DV01 of 73,828.09 and SPRD DV01 of 95,908.09. What position in an IRS and a CDS should be held if the IR DV01 and SPRD DV01 of $10 MM not..

  Forecasting interest rates based on prevailing

forecasting interest rates based on prevailing conditions.consider the prevailing conditions for the following factors

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd