The City of Chattanooga is considering building a park. The initial cost of the

Question

The City of Chattanooga is considering building a park. The initial cost of the park is $125,000 and the estimated annual operating cost is $8,000. Every ten years it is anticipated that major maintenance will be required at a cost of $25,000. The city is seeking a donor who would provide an initial amount that would fund the park forever (infinite service life). The city anticipates that it can earn 5% on the investment and would name the park for the donor.  How much would the donor have to provide?

$324,752

$166,998

$211,097

$45,778

(Also, include how to do it in excel)

$324,752

$166,998

$211,097

$45,778

Explanation / Answer

option A is correct.

if he donates $324,752 at the initial time, we should deduct the initial payment from it.

= 324,752- 125,000= 199,752

for this remaining amount the expected return is at 5% per annum

= 199,752*5%= 9,988 per annum

and the annual operating cost= 8000, it should deduct from the amount

= 9,988- 8000= 1988

and for the ramaining amount if we expect at the 5% return for the next 10 years, the total amount is

= 1988*12.578= $25,005

so the cost once for 10 years also can be achived.

so, option A is correct one.

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