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A foundation announces that it will be offering a scholarship every year for an indefinite...

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Finance

A foundation announces that it will be offering a 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 $100,000 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 ($400,000) in 10 equal annual installments, interest-free, starting two years after the last payment of the scholarship. This implies that the foundation is really giving an interest-free loan under the guise of a scholarship. The current interest is 6% and is expected to remain unchanged.

  1. What is the PV of the first scholarship (the scholarship includes both money given out to and the repayments received from the student)?

  2. The foundation invests a lump sum to fund all future scholarships. Determine the size of the investment today.

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