Reference no: EM13189643

TheTrust for Public Land is a national organization that purchases and oversees the improvement of large land sites for government agencies at all levels. Its mission is to ensure the preservation of the natural resources, while providing necessary, but minimal, development for recreational use by the public. All Trust projects are evaluated at 7% per year, and Trust reserve funds earn 7% per year.
A southern U.S. state, which has long-term groundwater problems, has asked the Trust to manage the purchase of 10,000 acres of aquifer recharge land and the development of three parks of different use types on the land. The 10,000 acres will be acquired in increments over the next 5 years with $4 million expended immediately on purchases. Total annual purchase amounts are expected to decrease 25% each year through the fifth year and then cease for this particular project.
A city with 1.5 million citizens immediately to the southeast of this acreage relies heavily on the aquifer's water. Its citizens passed a bond issue last year, and the city government now has available $3 million for the purchase of land. The bond interest rate is an effective 7% per year.
The civil engineers working on the park plan intend to complete all the development over a 3-year period starting in year 4, when the amount budgeted is $550,000. Increases in construction costs are expected to be $100,000 each year through year 6.
At a recent meeting, the following agreements were made:
• Purchase the initial land increment now. Use the bond issue funds to assist with this purchase. Take the remaining amount from Trust reserves.
• Raise the remaining project funds over the next 2 years in equal annual amounts.
• Evaluate a financing alternative (suggested informally by one individual at the meeting) in which the Trust provides all funds, except the $3 million available now, until the parks development is initiated in year 4.
Questions.

1. For each of the 2 years, what is the equivalent annual amount necessary to supply the remaining project funds?
2. If theTrust did agree to fund all costs except the $3 million bond proceeds now available, determine the equivalent annual amount that must be raised in years 4 through 6 to supply all remaining project funds. Assume the Trust will not charge any extra interest over the7%to the
state or city on the borrowed funds.