The government has imposed a fine on the Corner Tavern. The fine calls for annual payments of $150,000, $100,000, $75,000, and $50,000, respectively, over the next four years. The first payment is due one year from today. The government plans to invest the funds until the final payment is collected and then donate the entire amount, including the investment earnings, to help the local community shelter. The government will earn 6.25 percent on the funds held. How much will the community shelter receive four years from today?

Question

Quizplus · Accepted Answer

Each payment of the fine will be worth the following amount at the end of the fourth year:

1st payment = $150,000 x (1.0625)^3 = $183,089.06
2nd payment = $100,000 x (1.0625)^2 = $112,231.25
3rd payment = $75,000 x 1.0625 = $79,687.50
4th payment = $50,000 (no interest)

Therefore, the total amount at the end of the fourth year will be:
$183,089.06 + $112,231.25 + $79,687.50 + $50,000 = $424,008.81

The government will donate the entire amount, including the investment earnings, to the local community shelter. Therefore, the community shelter will receive $424,008.81 four years from today. However, only option C is closest to the value $424,008.81.

The Government Has Imposed a Fine on the Corner Tavern