Question

# In light of the impact of the coronavirus pandemic, Kalbarri Mutual Bank in Western Australia, would...

In light of the impact of the coronavirus pandemic, Kalbarri Mutual Bank in Western Australia, would like to set up a reserve fund. The fund will earn an interest rate of 4% per annum. If the fund pays a fixed amount of \$20 million to the bank annually for an infinite period, starting two years from today, how much does the bank need in the fund today?

Select one:

a. \$520.0 million

b. \$444.5 million

c. \$500.0 million

d. \$408.8 million

 In this case we would calculate present value of perpetuity payment received by bank after three years and then discount it to present value We would use beginning of the period formula Present value of perpetuity Annuity amount + Annuity amount/Interest rate Present value of perpetuity \$20 million + \$20 million/0.04 Present value of perpetuity \$520.00 million Calculate present value of \$520 million today Present value Future value*(1/((1+r)^n) Present value 520*(1/(1.04^1)) Present value 520*0.9615 Present value \$500.00 Thus, bank needs to have \$500 million in the fund today

#### Earn Coins

Coins can be redeemed for fabulous gifts.