The city council has aproved the building of a new bridge overRunning Water Cree

Question

The city council has aproved the building of a new bridge overRunning Water Creek. The bridge will cost $17,000 for initialconstruction and have a maintenance cost of $1,000. Thecouncil plans to withdraw money from the city's Bridges andHighways account to open a special account to cover the innitialconstruction and to fund a perpetuity to cover the maintenancecosts forever. How much money must be withdrawn from theBridges and Highways account if the city can expect to earn 5percent on the special account?

Explanation / Answer

Initial Cost is $17,000 Annual Maint cost is $1000 Int rate I = 5% So city needs to set a Perperuity of Annual value = PMT=$1000 toget the Maint account Ie Maint Lump sum = PMT/I = 1000/0.05 = $20,000 So Total amount to be withdrawn = 17000+20000=37000 From This amount, $17,000 will be used for construction of Bridgeand balance $20,000 will be invested in Special Fund at 5% pa togive annual payment of $1000 which will be used for Maint costpayments

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.