Question

Metropolitan Water Utilities purchases surface water from Elephant Butte Irrigation District at a cost of $100,000 per month in the months of February through September. Instead of paying monthly, the utility makes a single payment of $800,000 at the end of each calendar year for the water it used. The delayed payment essentially rep- resents a subsidy by Elephant Butte Irrigation Dis- trict to the water utility. At an interest rate of 0.25% per month, what is the amount of the subsidy

Answer 1

The amount of the subsidy is $6,000.

Step-by-step explanation:

Since the payment is made at the end of each calendar year and the months of usage are the months of February through September, this implies the payment was due at the end of September but dalayed for 3 months from the end of September to the end of December.

The amount of subsidy can therefore be calculated as follows:

Subsidy amount = Total utility bill * Interest rate per month * Number of months the payment is delayed = $800,000 * 0.25% * 3 = $6,000

Therefore, the amount of the subsidy is $6,000.