Metropolitan Water Utilities purchases surface water from Elephant Butte Irrigation District at a cost of $100,000 per month in the months of February through September. Instead of paying monthly, the utility makes a single payment of $800,000 at the end of each calendar year for the water it used. The delayed payment essentially represents a subsidy by Elephant Butte Irrigation District to the water utility. At an interest rate of 0.25% per month, what is the amount of the subsidy?
What will be an ideal response?
F = 100,000(F/A,0.25%,8)(F/P,0.25%,3)
= 100,000(8.0704)(1.0075)
= $813,093
Subsidy = 813,093 – 800,000 = $13,093
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