After a retiring from a successful business career, you would like to make a donation to your university. This donation will go into the schools endowment pool and the returns generated from the donation will support the salary of a new professor in the school on a perpetual basis. The university expects to earn returns of 5.5% on its endowment pool. You may assume that any distributions to support the salary will be made annually.

Part A) You can make a donation today (t=0) in the amount of $2,500,000. The first cash flow distribution from your donation to cover the professors salary will take place in one year (at t=1). Which of the following is closest to the annual salary payment that can be made as a result of your donation?

A.

$454,545

B.

$137,500

C.

$100,000

D.

$2,500,000

Part B) After further discussions, the university determines that the employment agreement with the new professor will call for annual salary increases of 2%. Given this new requirement, and assuming the first salary distribution will still occur one year from today, what is the starting salary (at t=1) that can be supported with your $2,500,000 donation?

A.

$87,500

B.

$50,000

C.

$187,500

D.

$140,250