Question
A local recreation commission is considering building a new arena that is expected to cost $1.5 million. The members of the commission need to decide
A local recreation commission is considering building a new arena that is expected to cost $1.5 million. The members of the commission need to decide if they should borrow the money and levy a tax on the local property owners to pay for the repayment of the debt. The cost of borrowing the money is 12%, compounded semi-annually, with the interest being payable every 6 months. The money would be borrowed through the province and would require full payment in 5 years. If the commission decides to go ahead with the project, there will be a need to set up a sinking fund to handle the repayment of the debt. The sinking fund pays 10.25%, compounded annually.
A friend of yours is a member of the commission and is complaining that he cant get the actual cost per year and the overall cost of the arena from the administration. Help him out by constructing the appropriate sinking fund schedule. Compute the annual and total cost of this project to the local taxpayers. Note that total cost means the borrowing cost and sinking fund expenditures for the arena over the 5-year period. (6 marks)
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Year Regular Payment Payment of Interest Increase in Fund Accum. Balance in Fund Accum. Book Value of the Debt
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