13.1 Warming-up Exercise
Considering the following situation
Endowment Portfolios
An independent non-profit is concerned about its financial future. The overall rate of return (dividends, interest, and capital gains) on the non-profit’s investment portfolio is 10 percent per year. In order to meet expenses, $300,000 must be withdrawn from the endowment income (and if necessary, from the principal) each year. Contributions to the endowment are $200,000 per year. Under which initial conditions will the endowment be sustainable over time.
A potential approach:
- Build an Excel Model that represents the endowment problem. The model may look like the image below.
Figure 13.1 Excel Model
- Use the model to explore what is the minimum amount of capital to make the endowment sustainable over time (Hint: Producing a line graph could be helpful for the exploration)
Figure 13.2 Graphical Representation of the Model
- Is the scenario in the graph sustainable? How does the balance needs to look like? What is the miminal amount?
Attribution
By Luis F. Luna-Reyes, Erika Martin amd Mikhail Ivonchyk, and licensed under CC BY-NC-SA 4.0.
