Reference no: EM132957042

Question - Suppose a government is making a series of payments to another government, up to the end of 2039.

The first payment is made on 1 January 2021, and is equal to $700,000;

All subsequent payments are made on the first of each quarter, but increasing at an inflation rate r, of r = 1.5% every 12 months (effective).

That is, the payments on 1 April 2021, 1 July 2021, 1 October 2021 are also $700,000 each, but all payments made in 2022 are $700,000(1+r) each, all payments made in 2023 are $700,000(1+r)2 each, and so on.

Required - Assuming an interest rate of 12% per annum (effective), what is the present value of the above payments as at 1 October 2020?