Question

You are building an addition to the University of Calgary’s MacEwall Hall’s north east side that will connect to another building. You have determined that there will be extra inspection costs throughout the project that are not allocated for in the present budget. The University is quite understanding and agrees with you about the need for extra inspections throughout the project and wants to know how much they should allocate now in order to cover the extra costs. Calculate the present amount the University should set aside today to pay an estimated $20,000 yearly costs of extra safety and quality inspections over the next 3 years at a rate of 3.5% compounded semi-annually

Answer 1

	Y1	Y2	Y3	Total
Expected Annual Payment	20000	20000	20000
Discount rate @ 3.5% compounded Semi Annually	0.9659*	0.9330*	0.9011*
PV of Annual Payments	19317.96	18659.17	18022.85	55999.98

Therefore, the amount to be set aside today to pay an estimated $20,000 yearly costs of extra safety and quality inspections over the next 3 years is $ 55999.98

* Discount rate = 1/(1+Intt rate%/2)*(n*2)