The Victorian state government offers you two options to pay the land tax for your investment property.
Question:
The Victorian state government offers you two options to pay the land tax for your investment property.
- Option 1: a lump sum payment of $25,000 one year later.
- Option 2: a monthly payment plan of $2,050/month, starting today, with the final payment to be made 11 months from today.
a) If the market interest rate is 6%, p.a. and interests are calculated and paid monthly, calculate the future value of the two options one year later and identify which option is cheaper.
b) Your parents would like to help you with the land tax by depositing a lump sum amount in your savings account. Assume your savings account earns the market interest of 6% p.a., compounded monthly. Given the cheaper option you've selected, i.e. your answer to part a), calculate how much they should deposit today?
c) If the monthly payments in Option 2 are made at the end of each month, without calculation, briefly explain how this change would impact your answer in part a) assuming the market interest rate is still 6% p.a. compounded monthly.
d) What is the effective annual interest rate (EAR) that would make you indifferent to the two options? (Note that the market interest rate is not given, you need to solve the interest rate that makes you indifferent to the two options)