Question

In: Accounting

An award is being​ established, and it will pay ​$11,000 every two ​years, with the first...

An award is being​ established, and it will pay ​$11,000 every two ​years, with the first installment being paid in two years. The award will be given for an indefinitely long period of time. If the interest rate is 3​% per​ annum, what​ lump-sum amount of money​ (invested now) will be required to endow this award​ forever? MARR is 3% Per year.

Solutions

Expert Solution

11000 every two years

Rate per year

3%

Future value factor with Principal value

Year 0

                1.0000

Year 1

                1.0300

Year 2

                1.0609

Interest components in future value factor for year 2 (1.0609-1)

0.0609

Amount Deposit for Today (11000/0.0609) (your answer)

   180,623.9737

Proof of answer

Initial investment

   180,623.9737

Add: interest for First year (180623.9737*3%)

        5,418.7192

Total Balance after year 1

   186,042.6929

Add: interest for Second year (186042.6929*3%)

        5,581.2808

Total Balance after year 2

   191,623.9737

Less: Fund Withdrawn for pay award

   (11,000.0000)

Balance after Second year

   180,623.9737

Add: interest for third year (180623.9737*3%)

        5,418.7192

Total Balance after year 3

   186,042.6929

Add: interest for fourth year (186042.6929*3%)

        5,581.2808

Total Balance after year 4

   191,623.9737

Less: Fund Withdrawn for pay award

   (11,000.0000)

Balance after Second year

   180,623.9737

Same Process Continue forever

ekkarill92 answered 1 year ago
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