Detailed Answer
Answer (C) is correct. The first step is to determine the amount that will be needed in 20 years. If the $500
million increases by 5% annually, the amount needed in 20 years would be $1,326,500,000 ($500 million × 2.653). Since there is already $100 million available in the fund, that amount will grow at 7% annually for 20 years to equal $387 million. Subtracting the $387 million from $1,326,500,000 leaves $939,500,000 to be raised. Use a present value table to find the present value of 20 equal payments that will accumulate to $939,500,000 in 20 years at 7% interest. Dividing the $939,500,000 by the future value factor of 40.995 (20 years at 7%) equals $22,917,429 per year, or approximately $23 million.