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Q2 (13) a) (3+3) Feridun announces that it will be offering one UW scholarship every year for an indefinite number of years. The first scholarship
Q2 (13) a) (3+3) Feridun announces that it will be offering one UW scholarship every year for an indefinite number of years. The first scholarship is to be offered exactly one year from now. When the scholarship is offered, the student will receive $10,000 annually for a period of four years, beginning from the date the scholarship is offered. This student is then expected to repay the principal amount received ($40,000) in 10 equal annual installments, interest-free, starting one year after the expiration of her scholarship. This implies that Feridun is really giving an interest-free loan under the guise of a scholarship. The current interest is 6% for all maturities and is expected to remain unchanged. (i) What is the PV of the first scholarship? (ii) Feridun invests a lump sum to fund all future scholarships. Determine the size of the investment today
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