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Calculating the Present Value of an Endowment

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A wealthy philanthropist has established the following endowment for a hospital. The details are as follows: a cash deposit of $ 8 M one year from now; an annual cash deposit of $3M per year for the next five years. The first $3M will start today; at the end of 5 years, the hospital will also receive a lump sum payment of $18M. Assuming the cost of money is 3%, what is the value of this endowment in today's dollars? Show your work.

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Solution Summary

Solution describes the steps to estimate the present value of given future deposits. Calculations are carried out with the help of suitable algebraic formulas.

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Let us calculate Present value of $8 M deposited one year from now
Future Value of deposit = FV = $8,000,000
Number of periods = n = 1
Discount rate = i = 3%
PV1=FV/(1+i)^n = 8000000/(1+3%)^1 = ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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