The Environmental Protection Department (EPD) operates the garbage landfill in H
ID: 2801194 • Letter: T
Question
The Environmental Protection Department (EPD) operates the garbage landfill in Hong Kong. When the landfill is closed 20 years from now, it is expected to cost $36,000,000 at that time to insure compliance with safety and environmental regulations. EPD can invest money at a 6% interest rate compounded quarterly How much cash would EPD have to set aside today in order to have the $36,000,000 in 20 years? a. b. Alternatively, how much cash would EPD have to set aside at the end of each quarter in order to have $36,000,000 in 20 years? c. EPD decides to set aside 6,000,000 today and then make annual payments for the remaining amount. Now how much would EPD have to set aside at the end of each year in order to have $36,000,000 in 20 years? d. Why does money have a Time Value?Explanation / Answer
Answer for question no.a:
Amount to be set aside =$36,000,000..
Funds are required after 20 years.
Interest rate=6%.
Compunded quarterly. Hence interest rate per quarter=1.5%.=rate
Number of quarter per year=4.
Total number of quarters in the 20 years=80=nper
Formula of excel to be used=pv(rate,nper,pmt,[fv],[type])
=PV(1.5%,80,,36000000,1)
=$10,940,045.31
The amount to be deposited today is $10,940,045.31 to receive $36,000,000
Answer for question no.b:
If the amount is to be deposited at the end of every quarter, then the amount is calculated by using pmt function of excel =PMT(rate,nper,pv,[fv],[type])
=PMT(1.5%,80,-36000000,,0)
=$775,739.63.
Answer for question no.c:
Amount to be deposited today=$6,000,000.
Future value of $6,000,000 is FV(rate,nper,pmt,[pv],[type])
=FV(1.5%,80,,-6000000,1)
=$19,743,976.72
Balance to be deposited in annual payments is $36,000,000 - $19,743,976.72
=$16,256,023.28.
Term =20 years.
Annual deposits to be made to obtain =pmt(rate,nper,pv,[fv],[type])
=PMT(6%,20,-16256023.28,,0)
=$1417274.19.
is the amount that needs to be deposited every year.
Answer for question no.d:
Money has time value becasue there are factors that influence like inflation, demand and supply of money etc.,
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