Vignette : The Astney Foundation (AF) was funded in 1951 by the heirs of a large brewing fortune. The foundation’s sole purpose is to support training for gifted young skiers in the United States in perpetuity. Yearly grants are provided to children between the ages of 9 and 15 to cover training, living accommodations, and education at Astney Mountain School. The$25 million portfolio is expected to generate a real return of 4% and cover operating expenses of 0.75%. General inflation is estimated at 2.5%, while costs covered by the foundation are expected to increase at 3.5%. The foundation is tax exempt, subject to no minimum payout requirement, and the trustees have expressed a strong desire to generate a 3% annual income return
Q : Calculate the dollar amount that can be distributed over the coming year that is consistent with AF’s long-term goals.
Answer :
- The dollar amount that can be distributed to students is $1 million (=0.04 × $25 million)
- Including operating expenses of $187,500 (=0.0075 × $25 million)
- Total is $1,187,500
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Can someone explain why the answer is not simply $187,500 (=0.0075 × $25 million) ? Isn’t that all the operating expenses?