(a) You’ve inherited $20,000,000 and have decided to usethis money to open a new

Question

(a) You’ve inherited $20,000,000 and have decided to usethis money to open a new animal shelter in Toronto one year fromtoday. The annual operating costs are estimated to be $450,000 andare expected to grow at a constant rate of 2% (inflation) startingin year 2. If the interest rate is 4.5%, would you be able to fundthis shelter?

(b) Given the above scenario, what would be the maximumamount available

for annual operating expenses?

(c) How much money would you need if you expected that you wouldonly have to operate the shelter for only 30 years (instead offorever) and the same scenario as in part (a)?

Explanation / Answer

20,000,000 in one year annual operating costs start 450,000/yr andwill grow @ 2% per annum starting in year 2 i = 4.5% a) money one year from now $20,000,000(1.045) = $20,900,000 in millions of dollars time period    money @ begin ofperiod      operating cost            balance @ end of year (includinginterest earned)      0                          20                    0                              20.9      1                          20.9                .45                            (20.9-.45)(1.045) = 21.37025      2                          21.37025               (.45)(1.02) =.459                (21.37025-.459)(1.045) = 21.85225625             Yes, the shelter can be funded as the interest rate will more thankeep up with inflation and the inheritance money will actuallycontinue to grow. b) $900,000 the first year and then $20,000,000(.045 - .02) =$500,000 every year after that c) has me stumped for now, I'll post later if I figure it out

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