Question

The interest rate is 10% but the government offers you a subsidized perpetual loan for $1m at 5%. in other words, you get the $1m today and, in return, you pay the government $50,000 a year forever (you a re immortal). how much is this subsidy worth?

Answer 1

Answer:

The worth of loan subsidy at 5% is $1000000 and at 10% is $500000.

Explanation:

The subsidized perpetual loan offer by government = $1000000

Interest rate = 5%

The amount paid for forever = $50000

Below is the calculation to find the worth of loan subsidy for forever.

Amount paid to the government for forever at 5% interest.

Total subsidy loan worth at 5% = $50000 /5% = $1000000

The subsidy loan worth at 10% = $50000 /10% = $500000

The worth of loan subsidy at 5% is $1000000 and at 10% is $500000.