1 problem found
A firm of engineers obtains the right to dig and exploit an undersea tunnel. Each day the firm borrows enough money to pay for the day's digging, which costs £\(c,\) and to pay the daily interest of \(100k\%\) on the sum already borrowed. The tunnel takes \(T\) days to build, and, once finished, earns £\(d\) a day, all of which goes to pay the daily interest and repay the debt until it is fully paid. The financial transactions take place at the end of each day's work. Show that \(S_{n},\) the total amount borrowed by the end of day \(n\), is given by \[ S_{n}=\frac{c[(1+k)^{n}-1]}{k} \] for \(n\leqslant T\). Given that \(S_{T+m}>0,\) where \(m>0,\) express \(S_{T+m}\) in terms of \(c,d,k,T\) and \(m.\) Show that, if \(d/c>(1+k)^{T}-1,\) the firm will eventually pay off the debt.
Solution: After \(n\) days they will have borrowed \(c\) for \(n-1\) days, \(c\) for \(n-2\) days, etc until \(c\) for no days. Therefore the outstanding balance will be: \begin{align*} c + (1+k)\cdot c+ (1+k)^2 \cdot c + \cdots + (1+k)^{n-1} \cdot c &= c\frac{(1+k)^n-1}{(1+k)-1} \\ &= \frac{c[(1+k)^n-1]}{k} \end{align*} At the end of \(T\) days the outstanding balance will be \(S_T = \frac{c[(1+k)^T-1]}{k}\). We can think of each payment of \(d\) during the subsequent period as being equivalent of a payment of \(d (1+k)^{m-1}\) \(m\) days later (as otherwise they would have accrued the equivalent amount in interest. Therefore after \(m\) days the amount paid back (equivalent) is: \begin{align*} (1+k)^{m-1} \cdot d + (1+k)^{m-2} \cdot d + \cdots + d &= \frac{d[(1+k)^m-1]}{k} \end{align*} Therefore the net position, \(S_{T+m}\) will be: \begin{align*} S_{T+m} &= \frac{c[(1+k)^T-1](1+k)^m-d[(1+k)^m-1]}{k} \\ &= \frac{(1+k)^m [c ((1+k)^T-1)-d]+d}{k} \end{align*} Therefore they will eventually pay back their debts if \( [c ((1+k)^T-1)-d]\) is negative. ie \(d > c((1+k)^T-1) \Rightarrow d/c > (1+k)^T-1\)