Question

A Tourism Project is being developed for which a trust was established 4 years ago. Today the strong payment of the initial investment was made in the amount of $ 1,350,000. It was estimated that maintenance costs will be $ 80,000 per year for the next 6 years; from the seventh year it will be $ 95,000 up to the sixteenth. It is thought that later, indefinitely, the complex will require improvements at the end of each year for $ 110,000. What amount was necessary to deposit in the trust, in order to be able to face all these obligations, if the bank set an interest rate of 8% for the first ten years and thereafter 10%?

Answer 1

To calculate the total amount necessary to deposit in the trust to cover the given maintenance expenses, we need to calculate the present value of future maintenance expenses, by discounting them at the applicable bank interest rate.

Total amount total amount necessary to deposit in the trust = 26,146.06 + 759,760.74 = 785,906.80

The calculations are as follows:

For year 17 and onwards, the expenses are expected to be fixed at $110,000 and interest rate at 10%, therefore the PV of year 17 costs = 110000/((1+Interest rate Year 17)*((1+interest rate for first 10 years )^10 years)*((1+interest rate fir next 6 years)^6 years))

= 110000/((1+0.10)*((1+0.08)^10)*((1+0.10)^6)) = 26,146.06

For the first 16 years below are the calculations:

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