Question

Excel Hydro took a loan contract which requires a payment of $40 million plus interest two years after the contract's date of issue. The interest rate on the $40 million face value is 9.6% compounded quarterly. Before the maturity date, the original lender sold the contract to a pension fund for $43 million. The sale price was based on a discount rate of 8.5% compounded semi-annually from the date of sale. Excel Hydro is also considering building a nuclear power plant, which will be ready for production in 2030. The country's governing body is also considering a decommissioning liability law for the operator to put aside $1 million every month towards decommissioning cost. If the production life of the plant is 60 years and the operator puts the money at the end of the month in a savings account, earning 7.25% compounded monthly. During the 60 years of production life of the plant, the operator will put $1 million at the end of the month in a savings account, earning 7.25% compounded monthly. At the end of the production life of the plant, there are no more contributions and the money is expected to grow at the rate of 6% compounded quarterly for the next 30 years. 1. How many months before the maturity date did the sale take place?

1 to 10

Answer 1

Answer to question No. 1 >

Loan amount Payable by Excel Hydro after 2 years = $ 40 million x ( 1+ 9.60%/4)^2*4

= 40 million x ( 1 + 2.40%) ^ 8 = $ 48.357 million

This $ 48.357 million is receivable by the lender.

Now, given that lender has sold this loan receivable asset at $ 43 million to pension fund.

Required how many months before the maturity did the sale take place = By solving the equation as below :

or, $43 million x ( 1 + 8.5%/2)^ n*2 = $48.357 million

or, $43 million x (1+4.25%) ^2n = $ 48.357 million

Solving the above,

n = 2.82 years = 17 months approx. (answer)

Answer to question No. 2 >

Value of Decommissioning Fund after 60 years = Type in excel the following :

PMT = 1,000,000

NPER = 60 YEARS * 12 MONTHS =720

RATE = 7.25%/12 = 0.6042%

PV = 0

TYPE = 0

FORMULAE = FV(RATE,NPER,PMT, PV, TYPE) = $12.492 Billion (answer)

Answer to Question No. 3 >

Value of Fund in 2120 = $ 12.492 Billion (as above) * (1 + 6%/4) ^ 30 * 4

= $ 74. 57 Billion

Answer to Question No. 4 >

Total Principal = $ 1 million p.m. x 12 months p.y. x 60 years = $ 720 million

Total Interest (for period 2030 to 2120) = $ 74.57 billion - 0.72 billion

= $ 73.85 billion

Total Interest (for period 2090 to 2120) = $ 74.57 billion - $ 12.492 billion = $ 62.08 billion

Note : As per HOMEWORKLIB POLICY, supposed to answer first 4 parts of the question. Hence have answered first 4 parts.