Robert became quite well-to-do as founder and president of Carlson Auto Paint and Supply, Inc

Economics Oct 24, 2020

Robert became quite well-to-do as founder and president of Carlson Auto Paint and Supply, Inc. (CAPS). Now, he wants to start a permanent fund to support research directed toward improved sustainability of painted surfaces at his alma mater. He plans to contribute money now so that $200,000 per year can be withdrawn each year forever, beginning in year 7. If the fund earns interest at a rate of 8% per year, how much money must be donated now? The amount of money that must be donated now is $

Expert Solution

At beginning of year 7 (end of year 6),

Present value of future perpetual withdrawals ($) = 200,000 / 0.08 = 2,500,000

Present value of this amount, discounted to year 0 ($) = 2,500,000 x (1.08)^{- 6} = 2,500,000 x 0.6302

= 157,550

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