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solution.
As a future graduate of the University of Minnesota’s prestigious Carlson School of Management, someday you would like to endow a scholarship (meaning give the university money in your name) to pay for tuition expenses for future CSOM students. Assume you just graduated (congratulations!). You plan to work for fifteen years after graduation before endowing this scholarship (at the end of the fifteenth year AFTER graduation). Annual tuition at UMN is $10,000 today, and is expected to grow at the long term average rate of inflation of 3% per year forever. Savings is expected to earn a return of 7% per year forever.
a. If the first tuition payment is due one year after the scholarship is endowed, and you would like the scholarship to pay all tuition for one student per year for the twenty years following the creation of the endowment, how much money do you need to endow the scholarship?
b. If you would like the scholarship to pay for tuition for one student per year forever, how much money do you need to endow the scholarship?
c. You plan to start saving for the endowment starting your first year after graduation (meaning first savings is one year after graduation). You plan to increase the amount you save each year by 5%, because you expect to have more income per year as time goes on. How much money do you need to save in the first year, so that you will have enough to endow the scholarship from part b (that pays tuition forever)?
d. HOW would your answer to part c. change if your savings earned 10% per year instead of 7% per year.
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