Question

d)The owner of a cemetery plans to offer a perpetual care service for grave sites. The owner estimates that it will cost $150 per year to maintain a grave site. If the interest rate is 8.50%, what one-time fee should the owner charge for the perpetual care service

Answer 1

Answer:

The one time fee that the owner should charge is $1764.71

Explanation:

To calculate the one time fee, we take this as a perpetuity and calculate the value or price of the perpetuity based on the fututre cash flows discounted to today's price by a certain dicount rate.

The discount rate is taken as 8.5% which is also the market interests rate.

The formula for the value/price of the perpetuity is,

Value / Price = Cash flow / Discount rate

Value / Price = 150 / 0.085

Value / Price = $1764.705 rounded off to $1764.71