Reclamation costs on a project are expected to be incurred over a 30 year period
ID: 2640549 • Letter: R
Question
Reclamation costs on a project are expected to be incurred over a 30 year period from 27 to 56 years in the future from now. Reclamation costs are estimated to escalate 7% per year in the future. Using a 7% annual discount rate as representative of annual reclamation cost escalation, the year 0 present worth of the 27 to 56 year future reclamation costs is estimated to be $1.0 million. It is assumed that money today and in the future over the 56 year life of this analysis can be invested in U.S. Treasury Bonds paying 10% interest per year. Determine the magnitude of year 0 investment that an investor needs to make in U.S. Treasury Bonds paying 10% annual interest to cover the year 27 through 56 future reclamation costs.
Explanation / Answer
The Problem requires to find the amout which will be $1M at the start of the 27th year.
ie.to find the present value of $1 M ------@10% fo 26yrs.
{Using the Formula---FV=PV(1+r)^n}
1 M =PV (1+.10)^26
PV=1000000/1.1^26= $83905.45---this is the magnitude of Year 0 investment
which will give $1 M at the start of the 27th year.and will earn 3% over and above
the 7% escalation cost.
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