Present Value of Endowment

Present Value (PV) – is the current value of a future sum of money or stream of cash flows given a
specified rate of return.

Endowment – is a donation of money or property to a non-profit organization, which uses the resulting
investment income for a specific purpose. Most of endowments are designed to keep the principal
amount intact while using the investment income for charitable efforts.

Example:

Calculating the Present Value of an Endowment

A wealthy philanthropist has established the following endowment for a hospital. The details are as
follows: A cash deposit of $8 M one year from now; an annual cash deposit of $3M per year for the next
five years. The first $3M will start today; at the end of 5 years, the hospital will also receive a lump sum
payment of $18M. Assuming the cost of money is 3% what is the value of this endowment in today’s
dollar?

FV= $8,000,000

N= 1

Rate= i= 3%

PV=FV(1+i)^n

PV= 8,000,000(1+0.03)^1

PV= 8,240,000
Temporary Life Annuities

A temporary annuity lasts for a predetermined length of time, rather than being tied to the
lifetime of the annuitant. In general, annuities can either pay out for as long as the beneficiary
lives or for a set period of years.