A Charitable Foundation Has $500,000 Invested in an Account That

question 160

Multiple Choice

A charitable foundation has $500,000 invested in an account that earns 7%.The foundation has promised to begin making annual payments to beneficiaries in one year,and the first payment will be $25,000.The foundation has promised that future payments will grow at a constant rate forever.At what rate can the foundation afford to increase payments assuming that it makes no additional deposits into the account?

• A)0%; it can't afford to increase payments forever without adding more money to the account.
• B)1%
• C)2%
• D)3%

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Definitions:

Bargain Purchase Option

A lease agreement term allowing the lessee to purchase the leased asset at the end of the lease term for a price significantly lower than its expected fair market value.

Lease Contract

A legal agreement in which one party permits another to use property, equipment, or facilities for a specified period in exchange for payment.

Ownership

The act, state, or right of possessing something, reflecting a legal or equitable title to an asset or property.

Premium Amortization

The process of gradually writing off the premium paid on bonds or other financial instruments over the life of the investment.