The government imposed a fine on a firm that requires a payment of $100,000 today,$150,000 one year from today,and $200,000 two years from today.The government will hold the funds until the final payment is collected and then donate the entire amount to charity.How much will be donated if the government pays 3 percent interest on the held funds?

Question

Quizplus · Accepted Answer

To find the amount that will be donated, we need to find the present value of the fine at a 3% interest rate. Using a financial calculator or Excel, we get:

PV of the fine today = -$100,000 - $150,000/(1.03) - $200,000/(1.03)^2 = -$416,281.55

Since we are donating the entire amount collected, we need to add the interest earned over two years. Using the compound interest formula, we get:

Interest earned = -$416,281.55 x (1 + 0.03)^2 = $46,691.96

Therefore, the amount donated will be:

Amount donated = -$416,281.55 + $46,691.96 = -$369,589.59

We need to ignore the negative sign since we are dealing with a donation. The final answer is:

Amount donated = $460,590.

The Government Imposed a Fine on a Firm That Requires