In: Accounting
Suppose a government has to make the following payments to another government, in perpetuity.
Answer: ___________________________________ [2 marks]
Time (month) |
Date |
Payment |
0 |
1 July 2020 |
$1,000,000 |
1 |
1 August 2020 |
$1,000,000 |
127 |
? |
? |
? |
1 June 2046 |
? |
? |
1 August 2079 |
? |
? |
1 September 2079 |
? |
SOLUTION:-
A). Accumulated value of the above payments as at 1 September 2079 will be $2,872 Million ($2,872,257,661).
This is estimated basis the assumption that 0.25% interest per annum will be applied monthly at 0,0208% per month and is applies at end of the month.
Thus, the 1 st jul 2020 will earn interest on 1st Aug 2020.
B) Table below:
Time (month) |
Date | Payment ($) |
0 | 1 Jul 2020 | 1,000,000 |
1 | 1 Aug 2020 | 1,000,000 |
127 | 1 Feb 2031 | 1,519,106 |
311 | 1 Jul 2046 | 2,787,353 |
709 | 1 Aug 2079 | 10,469,711 |
710 | 1 Sep 2079 | 10,469,711 |
C). The answer to above will decrease if the inflation is at 4% per annum instead of 1% per quater.
1% per quater when annualised works to 4.06% (as the percentage will be calculated on the sum after the inflation).
Since 4% per annum is less than 4.06% answer to above will decrease.
Thus, accumulated value of the above payments as at 1 September 2079 will be $2,765 Million ($2,765,426,889)
D). If the interest rate is 4.25% per annum (monthly 0.3542%) and inflation is 1.555%, accumulated value of the above payments as at 1 September 2079 will be $7,308 Million ($7,307,561,146)
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