Maintenance money for an athletic complex has been sought Mr

Maintenance money for an athletic complex has been sought. Mr. Kendall, Athletic Director, would like to solicit a donation to cover all future expected maintenance costs for the building. These maintenance costs are expected to be S1.4 million each year for the first five years, $1.7 million each year for years 6 through 10, and $2 million each year after that. (The building has an indefinite service life.) If the money is placed in an account that will pay 7% interest compounded annually, how large should the gift be? Click the icon to view the interest factors for discrete compounding when 796 per year. The gift should be $ million. Round to two decimal places.)

Solution

Value of the gift is Present Worth (PW) of all future costs, computed as follows.

Value of gift = PW ($Million) = 1.4 x P/A(7%, 5) + 1.7 x P/A(7%, 5) x P/F(7%, 5) + [(2 / 0.07) x P/F(7%, 10)]

= 1.4 x 4.1002** + 1.7 x 4.1002** x 0.7130** + 28.5714 x 0.5083**

= 5.74 + 4.97 + 14.52

= 25.23

**From P/A and P/F Factor tables