In light of the impact of the coronavirus pandemic, Katherine Mutual Bank in the Northern Territory, would like to set up a reserve fund. The fund will earn an interest rate of 4.7% per annum. If the fund pays a fixed amount of $11 million to the bank annually for an infinite period, starting three years from today, how much does the bank need in the fund today?
|In this case we would calculate present value of perpetuity payment received by bank after three years and then discount it to present value|
|Present value of perpetuity||Annuity amount/Interest rate|
|Present value of perpetuity||$11 million/0.047|
|Present value of perpetuity||$234.04||million|
|Calculate present value of $234.04 million today|
|Present value||Future value*(1/((1+r)^n)|
|Thus, bank needs to have $203.92 million in the fund today|
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